Daily Editorial Analysis

Sustainable business practices, Imperatives and pathways (GS Paper 3, Environment)

Context:

• The 2023 IPCC Report on Climate Change has noted that human-induced global warming of 1.1 degrees Celsius has spurred unprecedented changes to the Earth’s climate.
• Recent studies predict that the widespread impacts of climate change will intensify further, highlighting the urgent need for mitigation and adaptation.

 

Details:

• The International Monetary Fund (IMF) pegged the annual climate change-related losses to be to the tune of US$1.3 trillion, 0.2 percent of the global GDP during 2011-2020, increasing human misery and inducing alarming economic and environmental damage.
• With growing awareness and global commitment to arrest global warming, businesses are slowly moving from sole profiteering to making a sustainable socio-environmental impact.
• Modern enterprises consciously focus on balancing the three intrinsic aspects of sustainability and overcoming challenges by adopting various environmental benchmarks and Environmental, Social, Governance (ESG), and Corporate Social Responsibility (CSR) frameworks in their business practices.
• Businesses are switching to renewable energy sources to become net-zero organisations and strengthening their interrelationship with employees, customers, suppliers, and other stakeholders to work towards a common cause.

 

Sustainable practices:

• In a recent IBM survey, 51 percent of the respondents (business leaders and CEOs) from the top 10 economies advocated for the importance of environmental sustainability.
• However, moving towards sustainable practises through the ESG and CSR frameworks is fraught with the challenge of securing the bottom lines against the high economic costs of undertaking sustainable business practices.
• Additionally, greater adoption of sustainable practices impacts the consumers, who have to pay higher premiums for socially responsible products.

 

How companies are responding?

IKEA:

• IKEA, a global leader in home furniture, has prioritised climate finance to adopt sustainable business practices. IKEA reduced its total climate footprint by 5 percent, from 27.2 million tonnes in 2021 to 25s.8 million in 2022.
• Further, it also disclosed the outdoor air pollution generated throughout the supply value chain.
• It also ensured 50 percent plant-based meals in its food section and pledged a reduction of greenhouse gas emissions in its value chain.

 

NIKE:

• NIKE has made similar efforts to incorporate sustainable business practices.
• Its ESG Risk Rating of 19.6 (very low risk) is a measurement of its exposure to industry-specific prominent ESG risks and how it manages them.

 

Indian context:

• India’s Ministry of Corporate Affairs’ National Guidelines on Responsible Business Conduct advocate framing regulations and frameworks to infuse sustainable business practises into India’s corporate sphere.
• It mandates that the technology and processes utilised by businesses must be resource-efficient and low-carbon.
• Furthermore, it delegates that businesses must be responsible for and transparent about the impact of their operations on the natural environment and its stakeholders.
• Companies in India are encouraged to minimise any adverse impacts that they have on the socio-cultural, economic and environmental-ecological aspects of the planet.

 

Challenges:

• Climate change impacts the entire supply chain of a business and is accompanied by transition risks and event-driven, acute, and longer-term physical risks.
• They include environmental factors (such as water shortages), security of supply (the non-credibility of vendors), logistics (warehouses and cold storage transportation), changing demand for products (based on tastes and preferences of consumers), social factors (communal disturbance), the workforce itself (employee strikes), and profitability of a business.
• Supply chain leaders can move the dial significantly by creating a sense of quintessence for climate adaptation, leveraging risk management and contingency modelling, and matching actions to the continuum of risks and opportunities for the business.
• Sharing expenses, widening and expanding the scope of CSR, and tapping into each other’s unique skills and abilities could lead to increased productive, allocative, and dynamic efficiency of the enterprise.

 

Overcoming the challenges:

Financing green transitions:

• Businesses can allocate separate budgets for CSR and/or ESG activities on a compulsory basis for every financial year.
• Dedicated budget allocation is possible only with regulatory and legal compliance, which may lead to organisational and stakeholder conflict.
• Efforts that show on the balance sheets will also enable companies to attract greater green investments, creating a virtuous cycle and enabling a long-term commitment to sustainable business practices.

 

Justifying price hikes:

• People even in developing countries, are gradually becoming sensitive to climate change and are willing to spend more on sustainable products.
• With the advent of social media marketing, smart yet ethical marketing practices can further expand this consumer base.
• Climate-literate consumers will be willing to pay premiums for socially responsible products.

 

Overcoming technology constraints:

• While the archaic method of backing up on paper is still prevalent and useful, technology has evolved a million-fold to avoid fraud and malpractices.
• Going green calls for more comprehensive reliance on technology with proper safeguards.

 

Resolving greenwashing concerns:

• Organisations must emphasise on brand awareness and emotional marketing to convince consumers about the credibility of their sustainable practices.
• Convincing the consumers will require time, effort and multi-stakeholder involvement, eventually leading to increased coordination and business synergy.

 

Way Forward:

• There is a long way to go to infuse sustainable business practices into the traditional profit-making, revenue-generating and satisficing business models utilised by the majority of global businesses.
• A move towards universal business sustainability will need a multi-stakeholder approach, legal enforcement and regulatory compliance requirements backed by conducive government policies and stringent penalties for defaulters and specific incentives.