Mint

Businesses must make net-zero plans to go with our climate goals

Companies that prepare for the opportunities and risks that India’s net-zero transition entails will raise their odds of thriving, write Rajat Gupta and Suvojoy Sengupta in Mint.

Prime Minister Narendra Modi’s net-zero pledge for India, announced at CoP-26 in November, shifted the context for Indian business. Although the government may adjust its policies periodically, in line with the evolution of climate technology and other developments, the direction of travel toward net zero is now clearer than ever. That means businesses must set out sustainability plans of their own.

So far, though, few of India’s companies have defined and begun pursuing a detailed strategy to succeed in a net-zero economy. Instead, we find that many remain focused on isolated initiatives, which may end up in ‘pilot purgatory’, to boost environmental performance or achieve near-term improvements in their environmental, social and governance (ESG) rankings. Near-term goals do have their uses: they help instil operational discipline. Yet, unless companies also prepare for the long-term shifts that are likely to occur as the net-zero transition advances, they could miss meaningful opportunities to create value.

This is easier said than done. Costs of greener products (e.g., hydrogen, plastics, batteries) are declining, regulations are uncertain, and hence companies have to master the art of strategy under uncertainty.

These opportunities stand out in a recent McKinsey research report on the economics of a net-zero transition. Under a scenario where the world reaches net-zero emissions in 2050, our colleagues estimated that India’s capital spending on low-emission assets such as solar farms and electric vehicles would rise from its current level, 50% of capital spending, to 80% over the next three decades. For companies in many industries—especially those with energy-intensive operations and ones that produce energy, materials and capital equipment—this shift will come with big changes to markets and cost structures.

The good news from McKinsey’s research is that India possesses resources and attributes that can enable it to take advantage of the opportunities that a net-zero transition would create. The country has reserves of key minerals, such as zinc and rare earths, required to make climate technologies. India also ranks in the top quartile for patents related to climate change mitigation and by its count of science, technology, engineering and mathematics graduates.

Some leading Indian corporations have taken the net-zero outlook for India as a cue to plan accordingly. There has been an uptick in the number of independent renewable energy producers in the country in recent years. Markets are growing for industrial equipment like boilers, kilns and furnaces that can run on renewable power or hydrogen instead of coal, gas, or oil. Companies might also build businesses to produce sustainable materials like ‘green steel’ (made using renewable energy), recycled plastic, and recycled aluminium for export to the EU and other markets where rising demand for these goods has created price premiums.

There is also potential for Indian companies to develop innovative climate technologies across industries. Some companies are investing risk capital to incubate new technologies that can support the uptake of green hydrogen as a zero-carbon energy carrier in sectors ranging from steelmaking to transportation. Other possible tech-enabled offerings for a net-zero economy include energy efficiency, energy transition, and energy management services and electric-vehicle charging and analytics businesses.

In addition to transforming their business portfolios for a net-zero future, leading companies are making organizational changes. Some of them are redesigning their ESG management systems, reaching beyond corporate social responsibility (CSR) departments to embed sustainability targets in every function, be it supply chain management, finance or human resources. Along with these shorter-term targets, they are setting out moonshot aspirations. Tata Steel in India, for example, has announced its intention to cut its specific emissions in this hard-to-abate sector by about 30% by 2030.

Organizations are building tracking systems to monitor their progress towards these goals and investing in the capabilities of their people. One large conglomerate recently had all its leadership teams do a sustainability 101 learning programme.

What’s more, companies are allocating substantial financial resources to their sustainability initiatives—with bottom-line impact in mind. Choosing to install low-emission assets now can help a company reduce its operating costs and, in the long run, minimize stranded-asset risk (having to retire an asset before the end of its economic life). While these investments require significant capital, companies have more financing available. Instead of relying on government aid or investing their own funds, some are tapping into the ESG-oriented pools of capital that are gaining scale as institutional investors align their priorities with the sustainability agenda.

India’s ESG funds market is nascent at the moment but growing quickly: in early 2021, for example, there were 10 ESG funds, compared to only two at the end of 2019.

India, like all countries, faces risks along its net-zero journey, which McKinsey’s research also highlights. The country is more prone than most to the physical risks caused by climate change, such as extreme heat. Its large base of emissions-intensive assets is susceptible to stranding. And a high proportion of India’s labour force works in sectors that are now exposed to the transition’s potential effects. These risks make it all the more important for businesses to not only plan ahead, but to collaborate with stakeholders in the public sector to find solutions.

Companies that take a long-term view of both opportunities and risks and begin preparing for the net-zero transition can stand a better chance of thriving amid major changes in the years ahead.

This article originally appeared in Mint

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