Climate Change is making headlines every day thanks to the ongoing climate conference COP26 in Glasgow, the United Kingdom.
While broad commitments are being made by most countries to reverse effects of various human actions on climate, the question is how do these impact corporates and businesses generally at the micro level? Also, how do corporates convey this impact to their stakeholders? This is now seen as increasingly urgent, and a multipronged pressure is being placed on companies to report how their businesses are impacting Climate Change, and its impact on their business.
Largely, of course, companies are still following the Milton Friedman dictum that companies exist to make profits and wealth for shareholders. But Climate Change directly affects these profits, wealth, and even viability of businesses. More importantly, governments, activists, and even ethically-minded citizens are closely watching the actions (or neglect) of companies on dealing with Climate Change.
Organisations have an impact on the climate by how they conduct their business. What fuels they use? What products they make, and how they impact the environment? How do they dispose waste? So on… The term ‘sustainability’ sums all this up — do they conduct their business in a way that the earth remains sustainable for generations?
The other side is how is Climate Change affecting their business? For example, businesses in coastal areas could be destroyed by rising water levels. Could their customers be harmed by Climate Change resulting in reduction of business, and even bad debts? Banks/financial institutions, for example, have critical exposure here. Will the business remain sustainable as weather patterns change? If not, to what extent?
So, the question is how are corporates reporting this, with what regularity, with what detail, and with what precision? Unlike corporate governance reporting, a checkbox-reporting attitude is not acceptable here. If the reporting is not regular, detailed and specific, stakeholders, and even the government will make their own assessment, perhaps assuming the worst.
Fortunately, in India, the regulators are at the forefront for nearly a decade now. In May, the Securities and Exchange Board of India (Sebi) has prescribed an elaborate format for reporting on Climate Change, and other issues through the Business Responsibility and Sustainability Reporting (BRSR), which is applicable mandatorily for the Top 1000 listed companies from FY 2022-23, and voluntarily from FY 2020-21.
On October 26, Sebi released a consultation paper seeking suggestions on what disclosures thematic ESG (Environmental, Social and Governance) mutual fund schemes should make, and what norms they should follow. The formats of reporting are increasingly quantitative with even precise financial impact.
A company coming out as environment-friendly from such reports will be seen as sustainable, and hence a good investment. A company which is not environment-friendly will see its share prices tumbling. What’s more, activists and concerned citizens may even boycott its products. Ethically-minded employees may refuse to work for such companies.
Such companies could see adverse measures from regulators too in the form of taxes/cesses/bans. Their directors (as a recent research paper by Professor Umakanth Varottil elaborates) too could face liability for neglecting the negative impact of Climate Change by companies whose boards they sit on. Even auditors are increasingly being pressured by large institutional shareholders to ensure proper reporting, or get booted out.
Yet it is not all about sticks; there are carrots too. Apart from being sustainable and increasingly profitable in the long run, such companies could attract investments at higher prices, subsidies from the government, finance (green bonds), etc., and of course a strong, and positive corporate image. Products that mitigate or reverse the negative effects of Climate Change are obviously great business opportunities too.
The flip side of such reporting is whether it has become too elaborate and technical for small investors to understand, and assess their impact? Sebi’s reporting format, for example, is 35 pages long, packed with technicalese, with another 33 pages giving guidance on the format. However, it also depends on what supplementary easy-to-understand summary the company provides. Indexes and ratings by reputed institutions can also help.
It will not be surprising if such reporting soon also escalates right into the actual financial accounts. After all, a business that is expected to be unviable will face impairment/going concern issues, and hence major write-offs. For example, a machine that could be banned could face accelerated depreciation.
Further, while presently, the reporting is by the management, it will not be surprising, considering the serious impact, if the reports are required to be audited by specialist auditors.
To conclude, climate reporting is going to be an increasingly bigger part of the already thick annual report, and this is for the better. The Climate Change debate could be also understood through this analogy — if you take your dog for a walk on a public road, and it drops a turd, do you clean it up yourself? Or do you neglect it, eventually making the road unhygienic for the public, thus inviting criticism, costs, and even penalty? The impact of global warming and Climate Change on companies is not different. If we can’t improve the planet we live in, the least we can do is leave it the way we found it — and a report card assessing our performance could be an incentive to improve.
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