GIZ

Corporate Governance and Business Responsibility

An Empirical Assessment of Large Indian Companies

GIZ Study booklet

It is widely accepted today that the onus for business responsibility must lie with senior management and Board members of corporations. The contours of what constitutes ‘responsibility’ though are still under discussion and description. However, there is a broad consensus that this must imply integration of environmental, social and economic priorities within the business model and governance processes of companies.

The Board of Directors of any firm have a significant role to play in terms of providing strategic vision as well as performing critical oversight of business operations. Therefore any efforts at embedding sustainability within business operations, whether through mandatory or prescriptive frameworks, must originate at the level of the Board.

Additionally, the entire market ecosystem within which firms operate is also relevant to the business responsibility discourse. For instance, the performance metrics of production supply chains are often overlooked by companies. Even within large companies, oversight of supply chains, are limited to negotiations on price points and timelines. This must see radical transformation. Similarly, long term risk assessment frameworks around environment, social responsibility and good governance practices must become a part of decision making processes at the highest levels.

Lack of awareness at the level of the Board is not the only impediment to holistic integration of sustainability priorities in the case of large Indian companies. For enhanced community engagement to become a pillar of business operations, systemic policy hurdles need to be addressed (for example: inefficient licensing regimes in critical sectors).

In India, like in most other places, corporate governance and business responsibility tend to be viewed as being mutually distinct. However, this study shows that there is visible correlation between adherence to corporate governance regulations and business responsibility norms – which is precisely the paradigm of ‘responsible corporate governance’ that is referred to in this research report.

This study establishes that large companies that already have the basic mandatory processes and governance structures in place are more likely to also be the ones that tend to adhere to voluntary norms. Therefore, further analysis and research is required to study behavioural drivers at the level of the Board as well as the impacts of regulatory processes across and within sectors. On the external front, sustained effort is required by stakeholders to bridge institutional capacity gaps, in order to streamline and harmonise regulatory processes and policies with ‘intra-company’ mechanisms.

So clearly, two sets of core issues need to be addressed. The first, dealing with internal corporate processes; and the second related to the interaction of these with the regulatory environment and societal expectations. This study is the first step in analysing some of the above and beginning an engagement with multiple stakeholders to discover next steps and pragmatic pathways that would allow accelerated adoption of best in class responsible corporate governance practices by all and certainly by the large corporations that have a compelling impact on society, environment and development.

I would like to thank the Indian Institute for Corporate Affairs (IICA) and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, for their continued support and guidance in the conceptualisation, and writing of this report. And, I would like to congratulate Vivan Sharan and Andrea Deisenrieder for their stellar work and very interesting research on one of the most debated themes of these times.

Samir Saran

Chairman and CEO, gTrade

“Mitigating Carbon Emissions in India: The Case for Green Financial Instruments”

New Delhi, 18th of February 2013
Please find here the link to download the report.

Executive Summary
With the sun gradually setting on the Kyoto Protocol (Phase One), it has become quite apparent that the global response to resource scarcity and climate change is going to be variable and disaggregated. Increasingly, countries and businesses across the globe are adopting various financial mechanisms and policies in order to manage such challenges. However, many such responses are restricted to advanced, developed countries, whereas the effects of climate change and the increasing cost of resources such as fossil fuels are likely to be more severe for developing countries. This dichotomy in response measures needs to be urgently addressed, and this report is an attempt to highlight the benefits of an inclusive growth oriented financial response mechanism with particular focus on India.

In its first chapter the report briefly outlines the relevance of GHG emissions mitigation through in- clusive market based mechanisms in India. With shifting patterns of economic growth and increased global demand volatility companies and investors in emerging economies, such as India, need to rec- ognise the value created through the supply chain of business deliverables by mitigating emissions. Mechanisms which exclude companies that do not meet global benchmarks, whether by way of share- holder advocacy and investment exclusion, or regulatory policies, will have a significant impact on the way that these companies choose to grow.

Low carbon strategies can only be implemented if the emissions landscape and its effects on sustainable growth are clearly defined and understood. The second chapter outlines emissions trends in India in order to map the carbon landscape and set the context for the rest of the discourse. Chapter 3 examines the trends of energy consumption and emissions at a sector specific and firm specific level (within the assessed sector). It is found that firms in the assessed sector (cement) are operating in sub optimal con- ditions, along with a lack of policy frameworks and market based emissions reduction incentives – there are no indigenous market based mechanisms to incentivise and stimulate change.
A firm level case study of one of the bigger private players in the Indian cement sector has revealed that the firm’s financial performance could have been better. At the same time, capacity additions and increased output have caused the total emissions of the company to increase, which is not sufficiently offset by the revenue gains. As a result, the firm’s emissions intensity has been rising consistently for clinker production. However, enhanced use of additives has kept the overall GHG intensity of cement based revenue lower. The average emissions intensity of the company was higher for three years than the sector average for the same period. The high correlation between the firm’s environmental perfor- mance and its financial performance has been highlighted.
The results of chapter 3 are aligned with the philosophy that environmental performance must not be excluded from the range of parameters that are used by investors while choosing a stock, especially a long term investment. This is true since the two concepts are inherently interlinked under the overall aegis of sustainable growth. It highlights the need for developing market based mechanisms to signal investment opportunities based upon carbon efficiency and financial performance, as both tend to complement each other in the medium to long term.

Chapter four concludes that; companies preparing for risk are not risk averse, but rather are risk prepared. The difference is subtle but important. Market based mechanisms which incentivise good performance by channelling investments to firms that respond to risk better than their competitors in a given environment, help investors realise this distinction clearly. For “green” market mechanisms and investment vehicles to be viable and effective, they must efficiently ensure that the transmission mecha- nism works and only performance based, credible signals are relayed to the open markets. This becomes even more important in the context of a developing country due to the nascent capital markets, and urgent need for scaling up sustainability initiatives – both at the firm and policy levels.

Capital generation should not be looked at as the problem. Rather, redirecting existing and planned capital flows from traditional high-carbon to low-emission; resilient investment is the key challenge of financing transition to a low-emission economy. In order to facilitate such transitions, a universally replicable model will be used – a multipronged approach to achieve the above objectives. This would involve creation of innovative financial products based on purely quantitative data, create and publish sector wise and cross sectoral market reports, and facilitate progressive policy advocacy in order to en- able market realisation for its products. It will further seek to replicate the model in other developing countries through a hub and spoke approach to expansion.