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Building a case for a greener tomorrow

Why sustainability transition can be a good business case for companies in all sectors

Krishnakumar Ramachandran (https://medium.com/@krishna7797 )

05 January 2022 | Wageningen, NL

If Fox News were your main source of information on climate change, you would believe that sustainability is the antithesis of industrial and economic development. Intuitively, this makes sense — capitalism is the process of top-down consolidation of controls and systems of business development to extract maximum value out of a business idea, whereas the word sustainability evokes a sense of restriction. Between environmental regulations and the cost, logistics, and payoff (or lack thereof in revenue) of offsetting, incorporating sustainability into your company’s business plan seems like a burden. Yet, there can be no smoke without fire — if sustainability sciences, technology, and consulting are growing at the rapid pace they are, surely there must be a reason why many entrepreneurs and market leaders are focussing on making their businesses ‘sustainable’. But before we look into how there is a good business case for sustainability, especially for MSMEs, we need to ask the basic question, “What is sustainability?”

While many interpretations exist on what the term and its many auxiliaries mean, and some of these are contradictory. In many layman’s versions, environmental protectionism is the first thing that comes to mind. Immediately, many negative connotations are associated with it, including energy audits, environmental impact analyses, and carbon footprints which can on the surface seem like a financial burden that further requires investment and disruptions to operations and logistics. These views, while valid, miss the big picture — for there are great opportunities in production, energy, operations, branding, and marketing to increase revenue.

Reflecting this, the United Nations (UN) itself defines sustainability through the lens of three P’s — Planet, People, and Profit. Sustainability is not just seen as a set of measures to reduce the impact we have on our ecology, but as striving towards a self-sustaining system of interactions between social groups, the environment, and economic concerns. The goal is to optimally extract economic resources, information, and energy value from the system while reducing the magnitude of the consequences of this pursuit. This is further reflected in the UN’s Sustainable Development Goals, which promote a focus on improving specific indicators of both social and environmental development and spreading the economic benefits of enterprise across the population in a way that does not affect the right or ability to gain economically. In fact, only Goals 11 to 15 relate to the environment; Goals 1 to 10 are socioeconomically oriented. While admittedly, Goals 11 to 13 are the ones that are in the sphere of businesses and industries.

Since it is unfair to expect action without incentive, we now turn to discuss the various methods through which a strong sustainability action plan can create opportunities. While there is no one-shoe-fits-all recipe, there are still quite a few avenues to leverage sustainability measures by businesses to increase revenue.

How are emissions calculated?

While there are many ways through which emissions can be calculated, the Greenhouse Gas (GHG) Protocol is the most prevalent, internationally agreed framework with standardized methodologies and tools for companies, cities, and countries to calculate and keep track of their progress with respect to their emissions goals. The GHG Protocol’s Corporate Accounting and Reporting Standard [1] provides requirements and guidance to companies for developing inventories of the seven GHGs mentioned in the Kyoto Protocol. There are standardized tools devised by the office of the Protocol for companies, including cross-sectors, country-specific, and sector-specific tools, and tools for cities and countries as well. The main carbon emission accounting is done through the GHG Protocol for Project Accounting [2]. It is a comprehensive tool that does not depend on the policy landscape of the region the company is in and contains the various rules and guidelines through which reductions in GHG emissions can be calculated. Both the Standard and the Project protocol, and their respective tools, are currently used by corporates, NGOs, universities, and government agencies to provide quantitative analytical insight into reducing GHG emissions and improving sustainability.

Carbon Credits

Carbon credits are a system that gives companies credits for saving on carbon emissions. By reducing 1 ton of CO2 emissions (tCO2) from business activities or by taking up carbon offsetting, the company receives 1 credit. GHG emissions are measured in ton-equivalents, as there are seven classes of GHGs, which have the capacity to trap different amounts of heat. For instance, methane has 84 times the heat capture ability of CO2, and hence, 1 ton of methane released is the equivalent of 84 tons of CO2 released.

Carbon offsetting can be done by afforestation, energy reduction, carbon capture technology, protection/restoration of blue carbon sinks, renewable energy, and electric mobility. These credits are not only a certification of sustainability but are tradable like commodities to companies that require carbon credits. By trading carbon credits through compliance-based or voluntary markets, overall carbon emission can be reduced by the potential of the credit as a carbon commodity of sorts. This can lead to additional sources of revenue. Like many commodities, its value declines over time, and therefore, companies must innovate to reduce CO2 emissions.

Before trading, a company has to meet certain certification standards, such as the Gold Standard [3] (co-established by WWF), Verified Carbon Standard (most used in voluntary markets), and the International Carbon Reduction and Offset Alliance Standard, among others. These certifications lend trading credibility to projects and businesses. Such certifications also include an estimate of the amount of CO2 saved, and depending on the category of savings (i.e., through energy savings, renewable energy, or carbon capture), are assigned a certain value of credits. These credits, under Indian law, are treated as commodities, which can be traded.

While the current demand for carbon credits is nascent and in surplus, with more makers of credits than purchasers. This is reflected in the pricing of the credits being around $8-$15/tCO2 [3], which needs to improve to obtain significant investments for green projects. By August 2021, the market value of just voluntary markets is around $750M USD in revenue for around 240 million credits. This is a 58% year-to-date growth in revenue with a 27% credit volume increase. With revenue projected to grow faster than credit volume, McKinsey & Co. [4], the University College of London, and other forecasters expect demand to skyrocket, with the surplus expected to be depleted very soon, given that many large companies are looking to become net carbon neutral to around $50/tCO2.

Even small steps, in cases of scale, can help generate high quantities of credits. For example, the Delhi Metro Rail Corporation became the world’s first railway project to start generating carbon credits, through regenerative braking technology, which stores the energy lost during braking. This reduced upto 30% of electricity consumption, leading to 400,000 certified emissions reduction (CER) units from 2008–2018 [5]. This roughly lead to around Rs. 1.2 Crores per year in revenue just from the regenerative braking system.

Another stunning example of how an industry we see as not so planet-positive can also quickly help generate carbon credits, is that of mid-sized refrigerants company Gujarat Fluorochemicals Ltd. (GFL), which had way back in 2006 sold carbon credits worth Rs. 1,000 Crores to Noble Carbon Credits over 3 years [6]. In the first year, GFL earned Rs. 350 Crores, almost two times its then revenue of Rs. 182 Crores and 3.5 times its then profits. GFL reportedly saved around 6 million tons of CO2 annually through various technologies.

What’s even better is that carbon trade can be independent of a corporate structure. For instance, a group of Gond tribals producing pongai or karanj oil from the seeds of Pongamia pinnata to power generators to electrify their village (Chalpadi in Adilabad district, now Telangana) exported carbon credits to a German environmental group, 500ppm all the way back in 2003 [7]. The system is quite unique — to ensure power supply, each family had to provide 1 Kg of Pongamia seeds. This ensured that some 20,000 Pongamia saplings were planted, thereby saving around 900 tons of CO2 emissions from 140,000 Kg of oil they produced. They were then able to sell the 900 credits generated — ten years worth of carbon reductions — to 500ppm at $4,200. This strategy of planting Pongamia seeds has also become a way out of poverty for many in Chalpadi. A similar strategy was touted in the Handia Forest Range in Madhya Pradesh, through which villagers could earn upto $3,000 per year by restoring around 10,000 hectares of community forest land [8].

This trend is picking up in India, due to the low cost of reducing carbon emissions in the country. EnKing International, a leading carbon credit developer and supplier, became the world’s first carbon markets company to file for an IPO in November 2020, with them making over Rs. 100 Crores ($13.4M) from carbon trade [9].

There is a case to be made for being early on this bandwagon — unlike NFTs and even cryptocurrency, the technology and systems improvement required cannot be executed overnight. This means that to be ready to reap the rewards of the increasing prices, companies need to begin planning for this as soon as possible. Since this is an industry where newer technology for carbon reduction, avoidance, destruction, and capture, is proliferating rapidly, ‘technology-chasing’ could indeed lead to higher credit production. While the extent depends on whether the carbon credits produced will outweigh the costs of the installation of new technology and systems, there does seem to be significant scope for afforestation, renewable energy, and non-logistical electric mobility.

Brand Equity and Marketing

Of course, if one is looking to go green, it is sensible to market oneself as green. There are four categories of green marketing strategies, depending on the extent of sustainability and differentiability of ‘green-ness’ — viz., Lean green (intend to be good citizens and do not advertise their green actions), Defensive green (reactive measures to either mitigate a crisis or actions of competitors), Shaded green (taking green measures to improve sustainability and competitiveness, while green-ness is not an objective, but a choice/secondary factor), and Extreme green (green-ness is an essential or central part of philosophy of production and business) [10]. It is important to understand where your company lies in this matrix, to tailor how much you market your green-ness. Of course, this has significantly to do with how early the company decides to focus on sustainability, the scale of improvements it can make towards sustainability, and the sector in which the company is.

It is important to know how ‘green’ the company, product, or service looks to people — as this can depend on public perception, market surveys can help understand how to rebrand/improve branding. Nudges such as logos indicating green-ness, colour scheme choices, and most importantly, certifications from veritable sources, can go a long way in building trust with consumers of the company’s sustainable intentions [11]. Yet, it is important to understand where the line between green marketing and greenwashing (the use of green marketing to misrepresent, mislead, or provide false information on product/service sustainability) lies. Among the most important ways through which sustainability and its marketing can be improved are by rejecting planned obsolescence, fast fashion, and unsustainable packaging. Thus, it lies on marketers, who can be seen as cultural influencers, to push planet positive messaging through to the public.

Being more sustainable can also attract a larger customer base. By exploring niches such as veganism, plant-based products, organic products, biodegradable packaging and clothing, recycled products, and the like, the brand can not only continue to draw in its main target groups, but also new, sustainability-conscious groups. This is especially true of today’s youth, who prefer eco-positive consumer brands in an effort to reduce their own footprints. Moreover, rebranding to more luxurious equity can help even cover for reduced production volumes by commanding higher prices. With the cost of process and supply chain innovations to reduce GHGs and environmental degradation being quite low in India it is much easier to instigate change across brands and sectors in the country [12].

Climate Finance

The finance sector plays a large role in incentivizing sustainable development. By providing capital to businesses and activities that reduce impacts on the environment and society, financial institutions (especially ones aligned with the Paris Climate Accord) are increasingly encouraging businesses to better manage their carbon emissions, among other factors and indicators. By being transparent, i.e., reporting social and environmental risks on a timely basis, and showing willingness towards incorporating sustainability into the decision-making process, companies can take advantage of funding from a variety of banks, financial institutions, and collaborative initiatives. Some examples of prominent collaborative initiatives include the Net Zero Banking Alliance, the Principles for Responsible Investment, and the Principles for Responsible Banking, which include many well-known banks and financial institutions across the world.

This is also where sustainability advice from a consultancy can help — by collecting and analyzing data on Key Performance Indicators (KPIs), audits can help chart a sustainable roadmap for all kinds of key activities including procurement, production, operations, logistics, marketing, and management. When further backed with the certifications mentioned above, there is an added level of credibility to the businesses’ sustainability efforts. By sharing this data and roadmap with financial institutions, businesses can therefore obtain financial products, such as conditional loans, grants, and Sustainable Bonds, specifically Green Bonds, which also come with tax incentives and a similar credit rating to that of other debt obligations [13]. These come under the umbrella term of Environmental, Social, and Governance (ESG) issuances.

Green Bonds are a financing option that works like loans for environmental companies or projects to raise money for environmentally-friendly projects in exchange for a pre-decided interest rate. This is available for companies that have had their IPOs and are listed on stock exchanges [14]. Green Bonds can be broadly categorized into organization-backed bonds, asset-backed bonds, or hybrid/dual-recourse bonds. There are many types of bonds under these, including ‘Use of Proceeds’ bonds/revenue bonds to finance/refinance of green projects, Project Bonds, Covered Bonds, Securitization Bonds, and Loans, the lattermost of which can be secured against assets [15]. For more information on how each bond works, do refer to the references section. While ESG bonds are more expensive from the issuer’s perspective, due to the the need for external reviews, regular reporting, and impact assessment, the benefits include visibility of green assets, positive (green) marketing benefits, and the diversification of the investor base (especially for companies not conventionally identified with sustainability) [16]. In India, rules for green bond issuance were outlined by the Securities and Exchange Board of India (SEBI) in the Disclosure Requirements for Issuance and Listing of Green Debt Securities circular in 2017 [17].

Ever since the first one was issued in India in 2015, Green Bonds have shown tremendous growth in India, with upwards of $16B being issued by companies [18]. 94% of these bonds were issued by non-financial corporates, showing that value creation companies can equally partake in the issuance of green bonds. With India looking to be carbon neutral by 2070, it is estimated that the country must invest over $10T (yes, trillion) by then [19].

A prominent example is one issued by the Ghaziabad Nagar Nigam (Rs. 150 crores for 10 years at 8.1% interest in the Bombay Stock Exchange) to build a tertiary sewage treatment plant [20, 21]. Another example is from JSW Hydro Energy Ltd. ($707M for 10 years at 4.125% at the Singapore Exchange) to repay the debt on two hydro projects — a 1,000 MW project on the Sutlej river, and a 300 MW project on the Baspa river in Himachal Pradesh. The State Bank of India also issued such a bond ($650M for 5 years at 4.5% at India INX, Luxembourg Stock Exchange) to support renewable energy, pollution control, and sustainable transportation projects and transactions and create a ‘green corridor’ with Luxembourg. While these examples refer to large companies and multinationals, there are numerous examples of small start-ups and small and medium enterprises (SMEs) issuing green bonds to raise capital and satisfy Corporate Socal Responsibility (CSR) [22]. This can be posted on other exchanges across the world as well. With many countries in the EU allowing green ‘mini’ bonds for even unlisted SMEs, which can increase SMEs’ access to credit and finance [23].

The Big Picture

Amsterdam, where I currently work, is often called the birthplace of capitalism. The first ‘modern’ securities market in the world began here in 1602, where people shared the risks of long-distance maritime trade through stock ownership and bond dealing. This led to speculation about the future of the commodities being traded there, thereby laying emphasis on longer-term financial planning, for both investors and businesses. The historical basis of capitalism, thus, comes from the ability to subvert short-term financial performance for risk mitigation, long-term growth, and for bigger, more internationalized opportunities. This thought process is exactly what sustainability consulting promotes, as the subversion of immediate, often unsustainable profits to follow a transparent, well-planned sustainability roadmap can lead to sustained growth in funding and revenue through innovative new platforms of trade — especially of carbon as a commodity.

Carbon as a commodity can reshape the landscape of India’s equation with sustainability. Many across the world believe that India is the best-placed country to take advantage of the carbon credits system, and the country has already started proving it. With ample opportunity for offsetting and for environmental projects, especially in rural areas, this can not only help companies gain an extra, often large revenue source in exchange for environmental consciousness, but it can also bring many rural Indians with little formal financial education into the international carbon business. This presents an opportunity for companies and rural collectives to cooperate, to not only generate carbon credits through project funding and CSR, but to also improve the lives of people with much lower incomes than urban professionals and entrepreneurs. Carbon credits can, indeed, be a bridge that brings the benefits of capitalism to rural areas, while also taking measures to save the environment in a systematic, internationally recognized manner.

With green bonds and other ESG issuances becoming quite popular, climate finance is proving to reshape the investment climate in India. As debt securities with good long-term returns, green bonds are a solid investment opportunity that not only often pays higher than inflation rates in many developing and developed countries but can help lock down money towards financing sustainable projects, thereby limiting inflation if done so over a large scale. During WWI and WWII, war bonds were sold by the United States and many allied nations to raise money for a national cause. Today, we face an international cause — one which we are already seeing the effects of — in the form of climate change and environmental degradation. Hopefully, green bonds get the impetus they require to direct investments towards protecting our planet.

There are some challenges to overcome in the field, as there is no consensus on what a ‘green’ project or business looks like. Yet, while this flexibility allows certain leeway and leads to a lack of standardization, it also paves an opportunity to pursue case-specific financial products. The success of this is regional, depending on the market environment, the strength of regulatory frameworks, and demand from businesses and end-users.

References

  1. Corporate Standard | Greenhouse Gas Protocol
  2. Project Protocol | Greenhouse Gas Protocol
  3. CARBON PRICING: What is a carbon credit worth? | The Gold Standard
  4. A blueprint for scaling voluntary carbon markets to meet the climate challenge
  5. Maheshwari, M., & Goyal, N. (2015). Carbon Credit Accounting: A Case Study of Delhi Metro Rail Corporation. PACIFIC BUSINESS REVIEW INTERNATIONAL, 8(3), 113–116.
    (PDF) Carbon Credit Accounting : A Case Study of Delhi Metro Rail Corporation
  6. Gujarat Fluro sets record on carbon credit sale — Times of India
  7. Pongamia power enables Adilabad villagers to export carbon credits to Germany
  8. The greener side of carbon — Economy News — Issue Date: Nov 19, 2007
  9. In a world first, Indian carbon trader to come out with IPO — The Hindu BusinessLine
  10. The Effects of Sustainable Marketing on Brand Equity and Consumer Behavior
  11. What is Sustainable Marketing?
  12. Mongia, N., Bhatia, R., Sathaye, J., & Mongia, P. (1991). Cost of reducing CO2 emissions from India: Imperatives for international transfer of resources and technologies — ScienceDirect. Energy Policy, 19(10), 978–986.
  13. Green Bond Definition
  14. Explaining green bonds
  15. Everything You Need to Know About Green Bonds in India
  16. Facts and Fantasies about the Green Bond Premium | Amundi Research center
  17. SEBI | Disclosure Requirements for Issuance and Listing of Green Debt Securities
  18. Green Finance in India: Progress and Challenges
  19. Street Talk Episode 87 | S&P Global Market Intelligence
  20. Role Of Green Bonds In India’s Climate Change Goals — Environment
  21. Forbes India — Green Bonds, Sustainable Bonds Demand Picks Up In India In The Pandemic Era
  22. Going Green: Why to Raise Capital with Green Bonds? — FSG Journal
  23. Study on the potential of green bond finance for resource-efficient investments