Enable sustainable corporate governance

ESG – environmental, social and governance – is no longer just a buzzword. $15 trillion in global funds are focused on this space. Priority areas include responsible carbon management, greening market offerings and the supply chain that provides it, employee health and safety, community development and the circular economy.

The Securities and Exchange Board of India (Sebi) now wants India’s top 1,000 companies by market capitalization to report on how they promote sustainable growth this fiscal year. The U.S. Securities and Exchange Commission (SEC) recently proposed new rules for U.S. corporate climate-related disclosures. Now seems like a good time to move towards universal social good and legitimate profits in a post-pandemic world. Here are elements of what should be part of an ESG action plan for companies.

Equipment used in an engineering company may not perform optimally. Verification of performance ratings against original equipment manufacturer (OEM) specifications and ongoing monitoring will indicate which parts need to be replaced and whether equipment needs to be overhauled or replaced. This also works for other equipment.

Optimizing energy consumption always presents an opportunity for significant improvement. The type and source of energy used should be inspected, to encourage a transition to environmentally friendly and renewable energy options. Related steps include reinforcing building insulation to prevent energy dissipation, using fuel-efficient vehicles, and the simple discipline of turning off lights and appliances when not in use.

In addition, the emission of greenhouse gases (GHG) requires special attention. The adoption of recycling and destruction processes in industry is crucial. We need to be equally vigilant about sulfur hexafluoride emissions from electricity transmission and hydrofluorocarbon (HFC) releases from air conditioning system refrigerants. Sensing and compensation mechanisms are needed for this, and planting more trees could be an effective first step.

Understanding the innate benefits of a circular economy is key to progress. This involves sharing, reusing, recycling or reselling products, rather than throwing them away. It includes all forms of waste, including fabrics, scrap metal and obsolete electronics. Waste prevention and redesign can be considered later.

As with other initiatives, the big question is where to start. To get things off the ground, it’s a good idea to set up a think tank for a macro scan. Ideally, the team should include a board member, people leading manufacturing or other critical operations, and analysts who will gather and make sense of the data. The macro-scan should examine the regulatory, competitive and cross-industry landscape. The domains to target and the metrics to collect should be an explicit result.

The benchmark of the selected metrics should follow to determine the current status. This will involve studying past reports and current systems. Interactions with other stakeholders in the organization are essential to break down silos and develop insights beyond the numbers.

Next, the team must develop a roadmap for concerted action. The idea is to clarify the level of ambition of the organization, aligned with its objective. Also, key metrics, resources, and a phased program that ensures accountability. This is a good time to share the plan – macro-scan, baseline and roadmap – with the board. A key decision will be whether a subject matter expert is needed for step-by-step guidance in the ESG journey.

It is important to note that investors attracted to socially and environmentally responsible companies are also changing the valuation equations. The top 100 companies have published sustainability plans and their firm commitments. Many are eligible to issue ESG bonds that could yield $15 billion in the fiscal year. Listed entities, as well as those considering doing so, will soon want to apply for an ESG rating. Sebi proposed that these ratings be provided by accredited ESG rating providers (ERPs). It solicited input on the selection, methodology and rating process of LES.

While incremental greening is ESG nirvana, the invisible costs and destruction of the planet’s resources require further examination. Take the batteries that store energy in electric vehicles (EVs). To be truly green, the energy stored in batteries must exclude that obtained from coal-fired power plants. And electric vehicle batteries are large, weigh a ton, and contain significant amounts of lithium, nickel, cobalt, manganese, copper, aluminum, steel, and plastic.

Solar panel arrays require processing to make pure silicon, involving a variety of acids and hydrogen fluoride, trichloroethane and acetone. Additionally, toxic elements like gallium and arsenide are also needed. Wind turbines for wind power are huge and involve tons of concrete, steel, iron, fiberglass, and various rare earths. And whether recycling is happening in all of these spaces is also a key question. There is a need to consciously redefine ESG.

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