Exploring the role of Green Externalities Accounting in ensuring a sustainable Present and Future

Quantifying the Unseen: Assessing the Economic Impact of Hidden Green Externalities

by with No Comment EducationSustainabilitySustainability Reporting

Exploring the role of Green Externalities Accounting in ensuring a sustainable Present and Future

Abstract

Accounting, as a critical language of finance, plays a pivotal role in shaping modern economies. This research article delves into the multifaceted accounting world, specifically focusing on Green Externalities Accounting in India. It explores the impact of green accounting toolkits and standards on economic development, state relations, and businesses. The article concludes with a call to action for a more sustainable future.

Introduction to Green Externalities

Anthropogenic climate change poses a significant threat, capable of engulfing us in one fell swoop, and its impacts extend far beyond a sudden wipeout. The cumulative acts of degradation have prompted various organisations to develop action plans and indices, such as the Climate Risk Index [1] aimed at addressing the threats of climate change. As determining forces, how can human-run organisations position themselves within the shell of nature’s resources and contribute to a more sustainable narrative?

While there is plenty we can do to keep our activities in check, accounting remains at the forefront in offering a structured process of recording, summarising, and analysing financial transactions among and across leading organisations, businesses, and states. It provides stakeholders with essential information to make informed decisions, influencing business strategies and socio-economic landscapes. Highlighting the pivotal role of finance in climate policy, Article 2 of the Paris Agreement emphasises the necessity of aligning financial flows with a trajectory aimed at reducing greenhouse gas emissions and enhancing resilience to climate change.

India’s adoption of International Financial Reporting Standards (IFRS) was initially announced by the Securities and Exchange Board of India (SEBI) in 2010. The convergence and adoption, however, were optimal and only applied to a few companies voluntarily. [2] Although limited, we can not discount the role that accounting standards such as the IFRS and the like play in determining GDP standards and broader economic analysis; much of which has come to stand synonymous with progress and development. Amidst the towering skyscrapers and bustling city streets, the relentless pursuit of economic growth often takes centre stage. However, as we marvel at the soaring GDP figures, it’s time to ask a pivotal question: Does GDP capture the true growth of the nation? A World Bank report from a few years ago revealed that India incurred a staggering cost of $550 billion, equivalent to approximately 8.5% of its GDP, as a consequence of air pollution alone. Furthermore, the expenses related to external factors like water pollution and land degradation were potentially even more substantial. India’s practice of exporting commodities effectively results in the depletion of its natural resources, which in turn escalates the risk of desertification and significant land degradation. If these alarming trends persist, it is plausible that India’s food production could experience a decline of 10-40% within a century. Therefore, when celebrating GDP growth, it is imperative that we also take into account the depletion of our nation’s natural capital in our economic assessments. [3]

Taking into account green externalities aims to quantify the environmental impacts of economic activities, such as pollution or resource depletion, makes them visible in economic assessments. It considers factors including but not limited to greenhouse gas emissions, water usage, and land degradation. In the pursuit of development through multidisciplinary approaches encompassing socio-economic concerns and environmental sustainability, it becomes imperative to ensure enduring progress for the future. This is particularly relevant for developing economies like India, where a shift from agriculture to manufacturing and services sectors is underway. The inadequacy of the traditional System of National Accounts (SNA), which measures Gross Domestic Product (GDP) and Gross National Product (GNP), lies in its inability to capture the true essence of a nation’s wealth, income, and performance. It fails to account for the environmental impact via externalities, be it positive or negative. Additionally, the conventional SNA disregards the value of natural resources that remain untransformed into marketable goods or services. The concept of ecosystem services, which denotes the environment’s free services to humanity, remains absent from current national accounting methods. These services, often termed as the ‘GDP of the poor,’ are especially critical for impoverished communities. The absence of ecosystem services in national accounting overlooks their significant contribution. The evolution of Green Externalities accounting has gained substantial urgency in recent years due to the significant losses nations have suffered from neglecting this crucial aspect of economic analysis. Severity has unearthed consequences including habitat destruction, resource depletion, and climate change. These issues have led to ecological crises, natural disasters, and adverse health effects, all of which have imposed substantial economic costs.

As per the United Nations Environment Programme Report, 1997 [4], greening the GDP is one of our major pathways towards a Green Economy. The integration of Green Accounts into traditional accounting systems will not only enable policymakers to analyse the interconnections between a nation’s economic activities and its environmental costs but also quantify these costs at various stages of production processes. This will empower relevant agencies to access precise data for amending industrial practices that surpass established environmental limits. Beyond accounting and assessment, parameters associated with Green Accounting provide a more accurate representation of economic growth by considering environmental costs and holding businesses accountable for their environmental footprint. Finally, it enables governments to tailor policies for regional variations in environmental impact, promoting balanced development.

Tools for Green Externalities Accounting

Creating an effective toolkit for Green Externalities Accounting involves defining clear metrics, establishing data collection protocols, and developing standardised reporting guidelines. It requires encompassing both qualitative and quantitative data to assess environmental impacts comprehensively. To facilitate the development of Environmental Accounts, key international organisations, including the United Nations, European Commission, International Monetary Fund, Organisation for Economic Cooperation and Development, and the World Bank, jointly issued the System of Environmental and Economic Accounts (SEEA-2003) handbook in 2003. Two primary approaches to Green Accounting have been proposed: one involves creating separate ‘satellite’ accounts dedicated to valuing natural resources, while the other advocates for a comprehensive modification of the traditional SNA to fully incorporate environmental accounts. In India, the Green Indian States Trust (GIST) took a significant step by creating environmentally adjusted accounts in 2003 under the Green Accounting for Indian States Project. Nevertheless, Green Accounting in India is in its infancy. The former Minister of Environment and Forests, Government of India, Mr. Jairam Ramesh, advocated for a transition towards incorporating environmental factors into national accounts by 2015. The TEEB India (The Economics of Ecosystem and Biodiversity) Project, initiated in 2011, conducted some standalone studies in this regard but hasn’t sufficiently contributed to the development of a Green GDP due to a fragmented approach.

Among the list of prominent reporting and decision-making tools that businesses and organisations are adopting, this article briefly discusses four of the following: Environmental Impact Assessment (EIA), Life Cycle Assessment (LCA), Carbon Pricing, and Sustainability and ESG Reports.

Environmental Impact Assessment (EIA) happens to be one of the many successful policy innovations of the 20th Century for environmental conservation. In India, it took off in the late 1970s and was first ordered during the early 1980s, on the Silent River Valley hydroelectric project. Since its induction in countries undergoing rapid industrialisation and economic growth-such as India- EIA has served as a vital toolkit in helping entities account for the environmental impact of their operations and decision-making and ensure that progress is aligned with environmental protection.

As for its contemporary, the Life Cycle Assessment (LCA). LCA helps pinpoint environmental “hotspots” and offers insights into reducing the substantial energy and material inputs, emissions, and waste, influencing decision-making at various project stages for improved environmental performance. [5] Energy audits generally encompass a thorough examination of an entity’s energy consumption patterns, encompassing the operation of energy-demanding equipment like HVAC systems, lighting, and industrial machinery. Organisations commonly utilise Life Cycle Assessment (LCA) to pinpoint instances of energy inefficiency and devise conservation-focused approaches. [6] However, LCAs demand a substantial amount of data since they require the inclusion of all inputs and outputs related to the environment across every step of supply chains and throughout the entire life cycle of a product or service. Therefore, the establishment of a comprehensive national LCA database is essential for advancing more comprehensive and scientifically grounded approaches to address sustainability challenges at the national level.

Carbon pricing is a policy mechanism aimed at reducing greenhouse gas emissions by assigning a cost to carbon emissions. It can be implemented through carbon taxes or cap-and-trade systems. Carbon taxes impose a direct fee on carbon emissions, while cap-and-trade systems set a cap on emissions and allow trading of emission permits. The idea is to incentivize companies and individuals to reduce their carbon emissions by making it financially advantageous to do so. This mechanism is crucial in mitigating climate change and transitioning to a low-carbon economy. However, currently, India does not levy an explicit carbon price. In 2021, fuel excise taxes, functioning as an indirect method of carbon pricing, accounted for 54.7% of greenhouse gas (GHG) emissions, maintaining the same level as in 2018. Conversely, fossil fuel subsidies, which remained at 2.5% of GHG emissions in 2021 as they were in 2018, worked in opposition to the advancements made in reducing emissions.”[7]

ESG sustainability reports are documents produced by companies and organisations to communicate their performance and commitment to environmental, social, and governance factors. ESG factors cover a wide range of issues, including environmental impact, and social ESG reporting is essential for transparency, accountability, and assessing a company’s sustainability and ethical practices. It is increasingly important in today’s business world as investors and consumers prioritise socially responsible and sustainable investments and products.

Obstacles and Requisites for Incorporating Green Externalities in India

India is currently positioned as the fifth most susceptible country to the repercussions of climate change, potentially endangering 2.5% to 4.5% of its GDP annually. To address this vulnerability, India has committed to reducing the carbon intensity of its GDP by 33-35% by 2030 compared to its 2005 levels. Nevertheless, achieving this ambitious target requires a substantial investment of $2.5 trillion between 2016 and 2030, as highlighted in a report by the Ministry of Environment, Forest and Climate Change (MoEFCC) in 2015.

Despite the urgency of the situation, there remains a significant shortfall in climate-related investments, stemming from both public and private sources. A forthcoming study conducted by the Climate Policy Initiative (CPI) indicates that India is currently mobilising less than a quarter of the necessary investment to meet this crucial target, as reported in 2020. [8] This includes regulatory changes, data infrastructure enhancement, and capacity building for businesses and government agencies. A robust framework for valuing environmental externalities is crucial for accurate accounting. Stakeholders in this transition include governments, businesses, environmental organisations, and accounting bodies. Governmental responsibility entails enacting policies to incentivise green practices. Businesses need to invest in sustainability initiatives and report their environmental impacts accurately. Environmental organisations can provide expertise and advocacy while accounting bodies must adapt standards to include green externalities. However, the process of such assessment in India faces several deficiencies which include but are not limited to its exclusive application to project-specific issues, and its focus on data presentation over analysis.

To enhance the process, accounting and assessment must aim to encompass private sector projects influenced by economic policy changes. Specific criteria for evaluating environmental impacts must be tailored to each project and its local environmental conditions. Furthermore, public participation, beginning early in project development is crucial, necessitating informal channels and financial support for affected communities. Associated departments must meticulously review projects, recording decisions publicly along with post-project monitoring. In India, the potential exists to implement these improvements with existing scientific resources. [9]

In-store

The research article has attempted to delve into the crucial importance of implementing Green Externalities Accounting, highlighting its pivotal role in reshaping modern economies towards sustainability. It underscores stakeholders’ need to prioritise transparency throughout their operations and be held responsible for the repercussions thereof. Often, minor externalities represent a significant grey area where communities are enduring global environmental impacts that are often overlooked or insufficiently quantified, even when occurring in plain sight. Until we take responsibility for our actions and incorporate them into our accounting practices, we cannot effectively assess or mitigate the consequences these actions have on communities, whether they are directly or indirectly connected to us. Beyond accounting, there will arise a need to assess climate-induced fiscal risks, and changes in the structure of the economy. Now is the moment for action. Connect with Carbon Mandal today to lead your organisation into this essential accounting revolution. Take a bold step with us now to shape a future that’s truly sustainable.

List of References

  1. 20-2-01E global climate risk index 2020 – Germanwatch. (n.d.). https://www.germanwatch.org/sites/germanwatch.org/files/20-2-01e%20Global%20Climate%20Risk%20Index%202020_14.pdf
  2. Adoption of IFRS in India: Benefits, challenges, and measures. (n.d.-b). https://www.ijsi.in/wp-content/uploads/2020/12/18.02.012.20190402.pdf
  3. Gandhi, F.V. (2018, May 23). Natural capital in the 21st century. The Hindu
    https://www.thehindu.com/opinion/op-ed/natural-capital-in-the-21st-century/article23971804.ece
  4. UNEP. Governing Council (19th sess.: 1997: Nairobi). (1997). United Nations Environment Programme:: report of the Governing Council on the work of its 19th session, 27 January- 7 February 1997, 3-4 April 1997. United Nations Digital Library System. 
    https://digitallibrary.un.org/record/243368?ln=en
  5. Muralikrishna, I.V., & Manickam, V.(2017). Life cycle assessment. In Elsevier eBooks (pp. 57-75). https://doi.org/10.1016/b978-0-12-811989-1.00005-1
  6. Rahman, Md. M., & Islam, M.E. (2023). The Impact of Green Accounting on Environmental Performance: Mediating Effects of Energy Efficiency.
    https://doi.org/10.21203/rs.3.rs-2604713/v1
  7. Pricing greenhouse gas emissions: Turning climate targets into … – OECD. (n.d.-d).
    https://www.oecd.org/tax/tax-policy/pricing-greenhouse-gas-emissions-turning-climate-targets-into-climate-action.htm
  8. Department for Energy Security and Net Zero. (2019, July 2). Accelerating green finance: Green Finance Taskforce Report. GOV.UK.
    https://www.gov.uk/government/publications/accelerating-green-finance-green-finance-taskforce-report
  9. Evaluation of the environmental impact assessment procedure in India. (n.d.-c). https://www.tandfonline.com/doi/pdf/10.1080/07349165.1994.9725851
India and the Carbon Border Adjustment Mechanism: Paving the Way for Sustainability

India and the Carbon Border Adjustment Mechanism: Paving the Way for Sustainability

by with No Comment PolicySustainability

EU’s Carbon Border Adjustment Mechanism could spell worry for India’s export industries

EU’s Mission to Reduce Carbon Emission: ‘Fit for 55 in 2030 package’

According to IPCC’s sixth assessment report, with the current flow of production and consumption, global GHG emissions in 2030 make it likely that warming will exceed 1.5°C during the 21st century and make it harder to limit warming below 2°C. [1] As a result, carbon reduction pathways have increasingly become the need of the hour. Carbon pricing is one such pathway that curbs greenhouse gas emissions by placing a fee on emitting and/or offering an incentive for emitting less and is the EU’s primary mechanism for incentivizing industry to decarbonize.

Carbon Border Adjustment Mechanism or CBAM is part of the “Fit for 55 in 2030 package”, the EU’s plan to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, in line with the European Climate Law. Through CBAM, the EU aims to curb emissions by levying a carbon tax/tariff on its imports. This in turn will affect all countries exporting goods to the EU as exported goods would be imposed a carbon tax.  [2]

Demystifying CBAM: Understanding the Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (CBAM) is a critical initiative aimed at equalizing carbon pricing for products within the European Union (EU) and imported goods and is scheduled to launch its transitional phase on October 1, 2023, with the initial reporting deadline set for January 31, 2024. During this phase, importers will be obliged only to report their emissions; actual border taxation will begin in 2026. [3]

This transitional phase serves as a learning period for stakeholders, including importers, producers, and authorities, to gather valuable data on embedded emissions. The collected information will be used to refine the methodology for the definitive CBAM system.

During this initial phase, importers are required to report greenhouse gas emissions (GHG) embedded in their imports, both direct and indirect, without making any financial payments or adjustments. Importers will have the option of reporting through three methods in the first year: (a) following the new EU methodology, (b) using equivalent third-country national systems, or (c) relying on reference values. However, starting from January 1, 2025, only the EU methodology will be accepted. [3]

Several countries, such as Canada and Japan, are considering similar initiatives, underlining the global importance of addressing carbon emissions through mechanisms like CBAM.

The new tax is intended to discourage carbon-intensive operations while encouraging industries to have their processes go “green” as much as possible. To avoid “carbon leakage,” the tax would mimic the EU’s carbon market pricing. This refers to when the EU’s emission-cutting efforts are offset by rising emissions outside the union due to manufacturing relocation to non-EU nations with less ambitious climate regulations or offset by increased imports of carbon-intensive products. This mechanism encourages trading partners to decarbonize their industries. [2]

Unpacking the Impact: How Carbon Border Adjustment Mechanism Affects Exports?

Carbon Border Adjustment Mechanism Affects Exports

The Carbon Border Adjustment Mechanism (CBAM) targets carbon-intensive imports like cement, steel, aluminium, and more, initially covering over 50% of emissions in EU Emissions Trading System sectors. Exporters to the EU, such as steel and aluminium companies, must measure their production’s carbon intensity. Similar to the EU’s Emissions Trading System (ETS), which places a limit on the right to emit certain pollutants but allows firms to trade emissions rights, CBAM will be based on certificates. Companies that import goods into the EU will be required to purchase certificates that represent the amount of emissions generated during the production of these goods. The commission will calculate the price of these certificates, which will mirror the ETS to comply with World Trade Organization (WTO) rules. [4]

This initiative signifies a significant global step in climate mitigation efforts, potentially expanding to other sectors and countries, impacting various industries and exporters, including those from India.

Upon the permanent system’s implementation on January 1, 2026, importers must annually declare the quantity of goods imported into the EU in the previous year and their associated GHG emissions. They will then surrender CBAM certificates, with the certificate price determined by the weekly average auction price of EU Emissions Trading System allowances. [3]

Of a total of USD 74836.52 million, the iron and steel sector account for about USD 4109.08 million (5.49%) and aluminium for about USD 2245.25 million (3%) in terms of India’s export to the EU in FY2022-23. [5] Other major sectors including cement, fertilizers, energy and chemicals and polymers are also set to be affected by the CBAM. The cost of India’s steel exports to the European Union (EU) could rise as much as 17% following the full implementation of the CBAM. [6]

Gearing up for the Implementation of CBAM

The EU plans to expand the levy’s scope, including plastics, chemicals by 2026, and all sectors under the EU Emissions Trading System by 2030, potentially covering finished products like cars. Indirect emissions may also be considered. As free allowances in the EU Emissions Trading System are phased out from 2026 to 2034, this transition poses challenges for certain sectors and exports, as they’ll have to pay full domestic carbon costs, potentially impacting their competitiveness. [2]

Businesses must prepare for the impending changes related to the Carbon Border Adjustment Mechanism (CBAM). The CBAM could increase costs for products from regions lacking strong carbon policies and distant suppliers. Companies should assess their emissions’ geographical composition and consider cost vs. carbon trade-offs. As CBAM expands its scope, more businesses will need to prepare, impacting customs data, sourcing, and supply chains. Staying informed is crucial for EU importers of CBAM goods.

The impact of the Carbon Border Adjustment Mechanism (CBAM) varies among countries based on their export structure and carbon production intensity. India, a significant EU trading partner, has implemented energy efficiency and renewable energy targets. However, India’s hard-to-abate sectors have high greenhouse gas emissions due to the lack of carbon pricing and usage of fossil fuels. Adoption of emerging decarbonization technologies may lag compared to more regulated markets. Considering the evolving landscape of imports and exports, marked by the emergence of market mechanisms such as CBAM, it’s noteworthy that certain Indian businesses have already embarked on their journey toward a low-carbon transition, positioning themselves for the future. These companies have assessed their carbon footprint and set GHG reduction targets. [7]

It becomes imperative for Indian firms to adopt green solutions for businesses and put systems in place for tracking emissions, assessing the effect on their supply chain, calculating the financial cost-benefit of different supply chain and technology options, and planning for competitiveness in the face of increasing carbon border taxes. The government on the other hand should focus on reshaping India’s policies related to climate mitigation. [5]

Connect with Carbon Mandal to gain valuable insights into GHG Accounting and decarbonization. Start your sustainability transition today!

List of references

  1. IPCC. AR6 Synthesis Report. https://www.ipcc.ch/report/ar6/syr/resources/spm-headline-statements/. Accessed 13th September 2023.
  2. World Economic Forum. (2022) CBAM: What you need to know about the new EU decarbonization incentive. https://www.weforum.org/agenda/2022/12/cbam-the-new-eu-decarbonization-incentive-and-what-you-need-to-know/. Accessed 11th September 2023.
  3. Taxation and Customs Union. Carbon Border Adjustment Mechanism. https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en. Accessed 8th , 14th September 2023.
  4. Sinan Ülgen (2023). A Political Economy Perspective on the EU’s Carbon Border Tax. https://carnegieeurope.eu/2023/05/09/political-economy-perspective-on-eu-s-carbon-border-tax-pub-89706. Accessed 11th September 2023.
  5. PricewaterhouseCoopers. Carbon Border Adjustment Mechanism (CBAM). https://www.pwc.in/assets/pdfs/tax-knowledge-hub/carbon-border-mechanism-cbam-adjustment.pdf. Accessed 8th , 11th , 14th September 2023.
  6. CRISIL. SectorVector – Carbon coping. https://www.crisil.com/en/home/our-analysis/views-and-commentaries/2023/04/carbon-coping.html. Accessed 11th September 2023.
  7. Policy Brief | the EU’s Carbon Border Adjustment Mechanism: How to make it work for developing countries. https://gsphub.eu/news/brief-cbam. Accessed 8th September 2023.
  8. PricewaterhouseCoopers. EU Carbon Border Adjustment Mechanism (CBAM) – what do businesses in the Middle East Need to know? https://www.pwc.com/m1/en/services/tax/me-tax-legal-news/2023/eu-carbon-border-adjustment-mechanism.html Accessed 8th September 2023.
  9. Shah, A. (2023). How Indian Firms Should Deal With The European Carbon Border Levy https://www.bqprime.com/opinion/how-indian-firms-should-deal-with-the-european-carbon-border-levy. Accessed 8th September 2023.
  10. Ernst & Young. Carbon Border Tax Adjustment (CBAM): Everything but not tax! https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/tax/2021/ey-carbon-border-tax-adjustment-everything-but-not-tax.pdf. Accessed 8th September 2023.
  11. KPMG. EU Carbon Border Adjustment Mechanism (CBAM). https://kpmg.com/xx/en/home/insights/2021/06/carbon-border-adjustment-mechanism-cbam.html. Accessed 11th September 2023.
Representation of Indian Carbon Market

India’s Carbon Market: A Promising Future for Climate Action?

by with No Comment Carbon CreditsSustainability

Taking a look at the carbon market in India and its expected future

Climate change is undeniably one of the biggest threats we face today, and combating it requires innovative solutions. Enter the carbon market – an intriguing concept that has gained momentum worldwide. The carbon market is a system where businesses and governments buy and sell credits for emitting greenhouse gases. The market sets a price for carbon, which creates an incentive to reduce emissions.

Carbon markets can either be compliant or voluntary. Compliance markets are formally governed by laws at the national, regional, and/or worldwide levels. Today’s compliance markets primarily follow a concept known as “cap-and-trade” [6]. Whereas, in voluntary carbon markets emitters like businesses, people, and others purchase carbon credits to compensate for the release of one tonne of CO2 or similar greenhouse gases. These carbon credits are produced through actions that remove CO2 from the atmosphere, like reforestation [6].

International carbon markets can be crucial in achieving cost-effective global greenhouse gas emission reductions. The number of emissions trading systems is rising globally. The United States, Canada, China, Japan, New Zealand, South Korea, and the EU ETS are just a few of the countries that have national or subnational systems running or in the works [4]. The market for carbon rose 13.5% in 2022, reaching a new high of 865 billion euros. This expansion was primarily brought on by an uptick in the demand for carbon permits, which resulted in skyrocketing costs [2]. Based on revenue, the European Union Emission Trading System is the largest carbon market; in 2022, it represented over 87% of the total market size.

In India, with its booming economy and increasing greenhouse gas emissions, how would the carbon market play a role in combating climate change? In this blog, we delve into the potential of India’s carbon market, exploring its promises and future in order to meet the sustainable goals of India.

India’s Carbon Market – Carbon Credit Trading Scheme

The carbon market in India is still in its early stages of development, but it holds great promise for climate action. The market allows businesses and individuals to offset their emissions by investing in projects that reduce greenhouse gas emissions. In return, they receive carbon credits that can be used to offset their own emissions or traded on the open market. India has issued 35.94 million carbon credits between 2010 and 2022 and has also traded these credits on overseas markets [5].

The Government of India has been taking steps to establish a carbon market in the country.

The most recent update was, in 2023, when the union government sanctioned the establishment of the first domestically regulated carbon market in India [1]. The goal of the Indian government’s development of the Indian Carbon Market (ICM), which would establish a national framework, is to decarbonize the Indian economy by pricing Greenhouse Gas (GHG) emissions through the trade of Carbon Credit Certificates [3]. The Carbon Credit Trading Scheme is being developed for this purpose by the Ministry of Power’s Bureau of Energy Efficiency in collaboration with the Ministry of Environment, Forestry, and Climate Change. The plan calls for the establishment of a “National Steering Committee,” a technical committee, an accredited carbon verification agency, and the Central Electricity Regulatory Commission (CERC), which will act as the market regulator for carbon emissions [1]. By 2025 it is anticipated that  Renewable Energy Certificates (REC) and Energy Savings Certificates (ESC) will be traded, and by 2026 these will be changed to Carbon Credit Certificates.

Through the creation of a domestic registry and integration with power markets, the recently announced carbon credit trading plan would usher in a new era to restore the trading of emissions, CMAI (Carbon Market Association Of India) President Manish Dabkara, Chairman and MD of EKI Energy Services, states that “Taking a cue from its Paris Agreement commitment and chasing its NetZero goal, Government of India in consultation with the Bureau has released the Carbon Credit Trading Scheme (CCTS) for the institutionalisation and functioning of the Indian Carbon Market (ICM). It involves a process for compliance in which emission objectives will be established for specific industries and organisations, surpassing which they will receive credit certificates” [7].

The energy transformation initiatives will be strengthened by the new avatar Carbon Credit Trading Scheme, which will broaden their scope to include India’s potential energy sectors. In order to meet the climate goals, GHG intensity benchmarks and targets will be created for these sectors and will be in line with India’s emissions trajectory [3]. Based on how well these sectoral trajectories are doing, carbon credits will be traded. Additionally, it is anticipated that a voluntary system will be developed concurrently to stimulate GHG reduction from non-obligated industries. Through the purchase of emission credits by both public and private enterprises, the ICM will activate new mitigation alternatives.

However, the notification did not list the activities that would qualify under the carbon trading plan. “The Ministry of Power will advise notifying the Ministry of Environment, Forestry and Climate Change (MoEFCC) of greenhouse gas emission intensity targets. The accountable parties are required to reach the targets for greenhouse gas emission intensity. The announcement stated that the obligated companies “shall also be required to get any other targets, such as usage of non-fossil energy or specific energy consumption, as may be declared by the Ministry of Power under the Act as amended from time to time [1].

The Future of the Carbon Market in India

Industry insiders predicted that the $2 billion voluntary carbon credit market in India may grow to $200 billion by 2030 [1]. India is one of the biggest exporters of carbon credits, yet it lacks its own carbon market. Although there are a few carbon offsetting sites that offer carbon credits, there isn’t yet a market that is regulated [1].

In the past decade, there have been many carbon market initiatives launched in India. It is difficult to predict the future of any given market, and this is especially true for nascent markets like carbon. There are a number of factors that could affect the future development of the carbon market in India, including political stability and economic growth.

Political stability is an essential factor to consider when predicting the future of any market. Political turmoils will make it difficult for businesses to operate and thus create uncertainty about the policy environment. Such situations could hamper the development of the carbon market in India.

Economic growth is another important factor to consider when predicting the future of a market. A growing economy usually leads to increased demand for commodities, including carbon credits. With India’s growing economy and a larger number of businesses coming up, the demand for carbon credits could potentially increase.

India’s transition to a low-carbon economy

The benefits of having a carbon market in India are many. For one, it would create incentives for businesses to invest in green technologies and practices that lower their emissions. It would give Indian businesses a way to offset their emissions if they are unable to reduce them enough on their own. There will be challenges that India could face when it comes to the regulation of this carbon market and tackling these issues would take solid and structured guidelines.

A carbon market would send a strong signal to the international community that India is serious about tackling climate change. This could attract more foreign investment and help India transition to a low-carbon economy.

References

  1. Standard, B. (2023). Centre approves formation of India’s first domestic regulated carbon market. https://www.business-standard.com/economy/news/centre-approves-formation-of-india-s-first-domestic-regulated-carbon-market-123063000813_1.html. Accessed July 10th 2023
  2. Ian Tiseo, & 10, J. (2023, July 10). Global Carbon Market Size 2022. Statista. https://www.statista.com/statistics/1334848/global-carbon-market-size-value/#:~:text=The%20value%20of%20the%20global,which%20culminated%20in%20surging%20prices. Accessed July 14th 2023
  3. Ministry of Power & Ministry of Environment, forests & climate change to develop Carbon Credit Trading Scheme for decarbonisation. Press Information Bureau. https://pib.gov.in/PressReleasePage.aspx?PRID=1923458. Accessed July 10th 2023
  4. International Carbon Market. Climate Action. https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/international-carbon-market_en. Accessed July 14th 2023
  5. www.ETEnergyworld.com. (2023, March 28). Carbon credit: Understanding the concept, its evolution and implications – ET energyworld. ETEnergyworld.com. https://energy.economictimes.indiatimes.com/news/renewable/carbon-credit-understanding-the-concept-its-evolution-and-implications/99064759. Accessed July 14th 2023
  6. Munjal, D. (2023, January 26). Explained: What are carbon markets and how do they operate? https://www.thehindu.com/news/national/explained-what-are-carbon-markets-and-how-do-they-operate/article66260084.ece. Accessed July 14th 2023
  7. Business Today. (2023, July 3). Govt finalises scheme for Indian Carbon Market, Steering Committee to be formed. https://www.businesstoday.in/latest/economy/story/govt-finalises-scheme-for-indian-carbon-market-steering-committee-to-be-formed-388004-2023-07-03. Accessed July 16th 2023
Exploring the Connection Between Gender Diversity and ESG Performance

Representation of Women in Indian Corporate Leadership: A Recipe for sustainable business?

by with No Comment Gender EqualitySustainability

Exploring the Connection Between Gender Diversity and ESG Performance

In recent years, gender diversity has emerged as a crucial aspect of sustainable development. Many countries have recognized the importance of gender diversity in corporate governance and have started promoting it through various policies and initiatives. The impact of gender diversity on sustainability reporting has also been a topic of interest for researchers and policymakers. Sustainability reporting is crucial for companies to communicate their environmental, social, and governance (ESG) performance to stakeholders.

Women bring significant talent, experience, and educational background to business leaders today. Despite this, they are underrepresented in higher leadership roles. Organisations typically compete vigorously to recruit and promote these candidates. However, whether we’re talking about countries, Fortune 500 companies, governments, healthcare, or other service industries, there’s clear evidence of a natural and persistent gap between the apparent qualifications and the presence of women in top-level management. [1]

The higher the percentage of women on a business’s board of directors, the more likely the company would appear on lists of the most admired firms, the most ethical companies, the best companies to work for, and the best corporate citizens. Gender is continuously one of the driving variables of a firm’s corporate social responsibility (CSR) performance. [2]

Hillman et al. (2000), interpreted the resource-dependent approach as stating that the company will profit from the diversity of gender, age structure, experience, and professional background of the management. Thus, increased monitoring efficiency can be justified, among other things, by improved information processing and a desire to engage in discourse on the supervisory committee. This could lead to more precision in sustainability reporting. [3]

Breaking the Glass Ceiling: Examining the Representation of Women in Top-Level Management in Indian Companies

The representation of women in top-level management in Indian companies is low. A study by management consulting firm Zinnov, in collaboration with Intel India, found that only 11% of senior leaders in Indian companies are women, compared with 20% in mid-level roles and 38% in junior roles. The study also found that women are more likely to be found in non-technical roles than in technical roles.[4]

Several factors contribute to the low representation of women in top-level management in India. One factor is the lack of women in the workforce. According to the World Bank, only 24% of women in India participate in the labour force, compared to 79% of men. This is due to several factors, including social norms that discourage women from working outside the home, lack of childcare facilities, and discrimination in the workplace.[5]

Another factor that contributes to the low representation of women in top-level management is the lack of women role models. There are very few women who hold top-level positions in Indian companies, and this can make it difficult for young women to see themselves in these roles. [5]

Improving the representation of women in top-level management is important for several reasons including to help create a more just and equitable society.

The Impact of Gender Diversity on Sustainability Performance: A Closer Look at Indian Companies

A number of theories provide the theoretical justification for the association between the presence of female directors and sustainability, despite the fact that women’s directorship in Indian corporations is a relatively new phenomenon that can be traced to the mandating of specific sections in the Companies Act (2013). According to the widely accepted and advanced stakeholder and resource dependence theory, gender diversity on a company’s board of directors may put pressure on an organisation to adopt various environmentally friendly and sustainable business practices in order to satisfy the demands and expectations of its shareholders. The environmental, social, and general sustainability issues of the firm are seen favourably by the women directors. The characteristics that these women directors bring to the board, such as emotionality and empathy, as well as their expertise and competence, provide a feministic transformational approach to the board’s decision-making. The women on the board advocate for investments in socially responsible activities as well as other long-term sustainability projects. [6]

Research has consistently shown that gender diversity in the workplace leads to better decision-making, improved innovation, increased profitability, and enhanced social and environmental responsibility. By incorporating gender diversity into their sustainability reporting practices, firms can showcase their commitment to creating a more inclusive and equitable workplace and ultimately contribute to a more sustainable future. It is therefore essential for firms to prioritize gender diversity and inclusivity as core components of their sustainability reporting, not only for the sake of their employees but also for the benefit of their stakeholders, shareholders, and the wider community. The evidence is clear: when firms embrace gender diversity, they create a more sustainable, equitable, and prosperous future for all.

List of references

[1] Nanton, C. R. (2015). Shaping Leadership Culture to Sustain Future Generations of Women Leaders. Journal of Leadership, Accountability & Ethics, 12(3).

http://m.www.na-businesspress.com/JLAE/NantonCR_Web12_3_.pdf

[2] Alazzani, A., Hassanein, A., & Aljanadi, Y. (2017). Impact of gender diversity on social and environmental performance: evidence from Malaysia. Corporate Governance: The International Journal of Business in Society, 17(2), 266-283.

https://www.researchgate.net/publication/315758565_Impact_of_gender_diversity_on_social_and_environmental_performance_evidence_from_Malaysia

[3] Velte, P. (2016). Women on management board and ESG performance. Journal of Global Responsibility.

https://www.researchgate.net/publication/295858486_Women_on_management_board_and_ESG_performance

[4]https://www.livemint.com/news/india/women-s-representation-in-indian-companies-rises-11576086142768.html

[5] https://www.worldbank.org/en/country/india/overview

[6] Pareek, R., Sahu, T. N., & Gupta, A. (2023). Gender diversity and corporate sustainability performance: empirical evidence from India. Vilakshan-XIMB Journal of Management, 20(1), 140-153.

https://www.emerald.com/insight/content/doi/10.1108/XJM-10-2020-0183/full/html

Sustainability Reporting

ESG Reporting – Not an Option but a Necessity for a Sustainable Future

by with No Comment SustainabilitySustainability Reporting

Exploring the Rise and Relevance of ESG Reporting in India

Investors perceived Covid-19 as the century’s first “sustainability” crisis, resulting in a surge in global ESG investing. According to an EY report, 90% of international investors consider a company’s ESG performance, and 86% prioritise corporate decarbonisation [3]. Due to the significant risks and opportunities associated with ESG issues, companies, investors, and regulators are becoming increasingly interested in ESG reporting. A partner of Omnivore, Mr.Roy explains, “An ESG system is essentially a toolkit to help predict what can potentially go wrong for the environmental and social externalities of a business. These predictions help tremendously with safeguarding business models against risks that are avoidable when approached in the right way” [1]. The Principles for Responsible Investments (PRI) were released by the United Nations in 2006 and established an ESG Reporting Guideline for incorporating ESG factors into business strategy and policy with 2,000 signatories, it is widely regarded as the official reference point for ESG frameworks [4]. 

Aside from identifying and managing environmental and social risks, ESG reporting can build trust and transparency with investors, and attract sustainable investors. Whitney Sweeney, the investment director of sustainability at Schroders states, “In 2021 alone, there were more than 225 new or revised policy initiatives established globally with an ESG focus – the highest number ever recorded and more than double any previous year and expect a continued high level of activity into 2023”[5]. 
With a multi-trillion dollar pool of ESG-driven capital available globally, Indian companies are fast adopting the ESG approach into their overall business models. They recognize their responsibilities go beyond monetary returns to create positive social and environmental impacts as well [3]. This article will look into the rise and associated relevance of ESG Reporting in Indian businesses.

Rise of ESG Reporting In India

One would be amazed to know that there exists a possibility, in which the Indian economy can mobilise $1 trillion by 2030 towards top ESG priorities, particularly for financing the climate transition [6]. As ESG reporting becomes increasingly relevant, Indian corporations are being pressed to disclose their ESG performance. Although, similar to the global trend, there was a surge in awareness and ESG compliance after the Covid-19 pandemic, guidelines were present prior in India to encourage ESG Investments. “Ministry of Corporate Affairs” (MCA) published the “Voluntary Guidelines” on “Corporate Social Responsibility” (CSR), which in 2011 became the “National Voluntary Guidelines” (NVG) on “Social, Environmental & Economic Responsibilities of Business”. There were nine principles in the NVG that represented the “Long-Term Sustainable Value” of Indian companies [8].

The Securities and Exchange Board of India (SEBI) developed a system in 2017 that would allow businesses to voluntarily adopt integrated reporting, which would provide stakeholders with all necessary financial and non-financial information and ensure open communication about the company’s strategy, governance, and performance [8]. In the year 2020, under its Business Responsibility and Sustainability Reporting (BRSR) initiative, the SEBI made ESG disclosures mandatory for the top listed 1000 companies, previously 100 companies under Business Responsibility Report (BRR). This was done so as to increase transparency and encourage companies to adopt sustainable practices [2]. It was through this initiative that BRSR reporting came to be in India. 
Corporate Social Responsibility (CSR) is mandated by the Indian government for companies with a net worth of 500 crore rupees, a turnover of 1000 crore rupees, or a net profit of 5000 crore rupees. At least 2% of these companies’ net profits should be spent on CSR endeavours. ESG profiles should also be disclosed in order to attract capital from global ESG investors and financiers [3]. The Bombay Stock Exchange (BSE) published the Guidance Document on ESG Disclosures in 2018, which acts as a guideline for voluntary ESG reporting. It listed 33 specific issues and metrics on which companies should focus when disclosing their ESG information to investors [8]. The above-mentioned ESG reporting guidelines and government initiatives were set to increase the rate of ESG compliance and thus ESG investments in the country.

Relevance of ESG Reporting for Indian Businesses

At the United Nations Climate Change Conference in Glasgow last year, Prime Minister Narendra Modi set India’s net-zero emission target for 2070, establishing a business case for net-zero emissions [9]. As evident in the term, ESG reporting makes a direct positive impact on environmental issues, employee safety and well-being and governance and policies. With the increased risk of climate change, the relevance of ESG reporting has increased manifold, in regards to Indian companies. Investing in ESG practices will boost India’s growth, reduce environmental risks and reduce its capital raising costs. 

Increased capital and improved risk management are the highlight benefits that companies can achieve by prioritising ESG. For instance, it is more likely that companies with strong environmental practices can access capital from socially responsible investors, as well as face fewer penalties for environmental violations [2]. If Indian companies ignore developing strong ESG frameworks, they can lose INR 7,13,800 crore due to climate-related risks within the coming next five years. In order to attract investors, businesses need to demonstrate climate resilience and aim to eliminate emissions [3]. 
ESG reporting also includes companies in the chemicals, refining, and cement industries. They would have to operate ethically, use available technology to be effective and reduce emissions, and effluent treatment, not discharge untreated waste into the soil, water, or air, and also care for their minority shareholders and the broader community [7].

Next Steps in ESG Reporting 

In terms of environmental and social risks, climate change will be significant for Indian companies as India is among one of the most vulnerable countries that will have to deal with the consequences of the same. Indian businesses, more or less, do not have a choice but to consider ESG factors in their business strategy and risk assessment and thereby start ESG reporting. For successful ESG reporting and investments, expert guidance and education are necessary. Investors should work with investment advisors to identify their ESG and financial preferences when recommending ESG products.

If you are interested in developing ESG reporting at your firm and contributing towards a sustainable future, look no further! Connect with us to gain invaluable insights on how to carry out ESG reporting that would best suit your business and be relevant in today’s evolving market and economy. Our experts can guide you on ESG reporting guidelines, BRSR reporting and innovative strategies enabling your business to thrive in the long run.

List of References  

  1. Shanthi, S. (2023, February 17). ESG investing gains momentum in India. https://www.entrepreneur.com/en-in/news-and-trends/esg-investing-gains-momentum-in-india/445949#:~:text=%22This%20is%20a%206x%20increase,climate%20tech%20investments%20in%20India. Accessed April 17, 2023
  2. The rise of ESG investing in India: What it means for corporations. (2023, February 27). https://www.vaishlaw.com/the-rise-of-esg-investing-in-india-what-it-means-for-corporations/. Accessed April 17, 2023
  3. Lin, B. (2023, January 31). India transforms its ESG landscape to be future-ready. https://timesofindia.indiatimes.com/blogs/voices/india-transforms-its-esg-landscape-to-be-future-ready/. Accessed April 19, 2023
  4. What is ESG Investing? https://www.adecesg.com/resources/faq/what-is-esg-investing/#:~:text=ESG%20Investing%20. Accessed April 19, 2023
  5. Hicks, C. (2023, January 10). ESG investing trends for 2023 | investing | U.S. news. https://money.usnews.com/investing/investing-101/articles/esg-investing-trends. Accessed April 19, 2023
  6. India can attract $1 trillion in ESG Investment: Stanchart. (2022, September 27). https://www.thehindubusinessline.com/markets/india-can-attract-1-trillion-in-esg-investment-stanchart/article65942249.ece. Accessed April 20, 2023
  7. Rise of responsible investing. (2022, April 25). https://economictimes.indiatimes.com/wealth/invest/rise-of-responsible-investing/articleshow/91068701.cms?from=mdr. Accessed April 20, 2023
  8. The importance of “ESG” and its Application in India – LEXFORTI. https://lexforti.com/legal-news/wp-content/uploads/2021/04/The-Importance-of-ESG-and-its-application-in-India.pdf. Accessed April 20, 2023
  9. Tikoo, R. (2022, May 07). How Indian businesses can grow sustainably with ESG approach. https://planet.outlookindia.com/news/how-indian-businesses-can-grow-sustainably-with-esg-approach-news-414652. Accessed April 20, 2023