There is a cost to adaptation, but adapt we must

By Morningstar |  26-11-21 | 

At the Morningstar Investment Conference, India, Morningstar’s CEO Kunal Kapoor, engaged with Nadir Godrej, MD of Godrej Industries. Here are brief excerpts from the conversation.

How do you strike a balance between shareholder wealth maximization versus the larger environmental and social costs of doing business?

Michael Porter's concept of shared value ensures that there is no tension between these two. In India, we have the concept of compulsory Corporate Social Responsibility (CSR) spends of 2% of net profit. This spend can be done to solve social problems, while simultaneously benefiting the business to some extent. In many cases, shared value opportunities provide social good, while enhancing profitability. Of course, taxes or training mechanisms can also be used to price externalities and incentivize businesses. Such efforts need not slow down the economy.

A uniform carbon tax would protect all our backs collected by each nation's state, but universal in its rate. All GHGs would be fair game, every country should charge the same. The benefit that this would yield would be a level playing field. Just how high should this tax be? Based on today's admissions rate, $60 per metric ton wouldn't be a trivial sum. In dollars, it would be 2 trillion. Compared to global GDP, the percentage is less than 3. Compared to taxes then again, the percentage is less than 10. Of course, some would then take a call to reduce emissions, not pay at all. But bear in mind, it's not a cost.

A UBI could be instated. Some other tax could be rebated. Not every nation will take this call. Businesses shouldn't wait. It doesn't pay to wake up late. Efficiency always pays. Green energy is cheaper. There may be some short-term pain, but over time we will surely gain by preserving profit and planet.

Do you think that shareholder activism will elicit greater disclosure of firms' exposure to climate change risks?

Indeed, it can, but any responsible firm should want to disclose its policy. Companies that don't focus on sustainability may not survive. I firmly believe becoming sustainable is not about sacrificing but optimizing.

How must corporates address the tension between short-term profitability and the very urgent need to reduce emissions?

For corporations, the real game is to survive, thrive and sustain. A long-term view is a must. There is no way business can gain if planet and people don't sustain. With a collective pact and guidelines on how we should act, things will happen that much faster. That’s why the United Nations Sustainable Development Goals (SDGs) are important.

Governments will play their roles in achieving all these goals. But business can give a helping hand. We all ought to pay careful heed to Michael Porter. With shared value, there's no cost for doing good as nothing's lost. All it takes is a thinking brain to remove a societal pain and combine it with a business gain to create a sustainable chain of endless mutual benefit. This concept is a tremendous hit.

It is no longer climate change within a tolerable range. A crisis is what it's about - fires, floods, drought. The situation is very dire. We must adapt, and there is a cost to adaptation. It's rising fast in every nation, as well as for the world at large. This will be a heavy charge.

Prevention would be far more shrewd. We need to act collectively. With water, carbon or solid waste, we must make haste to make our net emissions zero.

Technology can pave the way; technology can save the day. As technology takes a leap, green energy gets cheaper. Solar energy will hit the goal of being cheaper than even coal in India, in a handful of years. Already we and our peers are sourcing solar electricity at lower rates than from the utility. Our cost of water is not so high. But yet, we attempt to reduce our water consumption. Our water use won't disappear, so we must aim to be neutral. Ultimately, the benefits that we reap will compensate for the cost.

Technology, banks and financial services companies typically receive high ESG scores. How are manufacturing companies like Godrej moving forward towards conserving in areas like renewable energy, water consumption, greenhouse gases, emissions, packaging, and waste management?

Before compulsory CSR, our group had gone very far. We tried to apply the shared value idea in our group. In the year 2010, studies were commissioned. We launched Good & Green. Our employees joined the loop. The benefits outweighed the cost. Our employees played a role in choosing each and every goal.

The UN has a lengthy list. We focus on three that we think would be the key for all the others to fall in place: good health through perfect sanitation, environment, and education. Most of these can be seen in our programme Good & Green.

We are committed to carbon, water and solid waste neutrality. On plastics, we moved later on to the scene. The government now mandates that we pick up as much plastic from the market as we put into the market, so that each company in a sense is neutral.

We also use our mandatory CSR spends for watershed development. We have through CSR spends put up projects to convert plastics into diesel. It's best to recycle plastics, but plastics that can't be recycled, mixed plastics, can be converted into diesel and other uses can be found for them. They can be added to asphalt. So, we do believe in a circular economy. And in initiatives such as plastic waste, we want to work with the entire industry, even work globally, so that all of us can achieve this together.

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