4 Uncertainties in managing sustainable businesses

While businesses are motivated to address the sustainability challenge, they are faced with numerous uncertainties while implementing related policies. Implementing sustainable business strategies involves investment in the latest technologies, managing concerns of various stakeholders from value chain partners to customers to investors, and ensuring compliance with applicable regulations. The top 4 uncertainties involved are:

1. How fast will technology provide scalable solutions?

Today, key business activities involving manufacturing, agriculture, animal husbandry, transportation, and many others, lead to releasing of greenhouse gases and contribute to climate change. There is a need for innovative technologies to perform these activities without emitting greenhouse gases to ensure sustainable development.

One of the most crucial challenges is to produce carbon-free electricity at a large scale from clean energy sources. While scalable technologies for generating electricity from solar and wind energy are available, the power generation from these sources is intermittent and needs to be supplemented with alternate sources. Currently, scalable clean solutions are being researched using nuclear power, geothermal energy, offshore winds, etc. Ways and means are being identified to produce affordable, grid-scale batteries that can store electricity generated from solar and wind for longer durations to overcome seasonal intermittency. Once the electricity challenge is solved, we will need to find innovative ways to electrify every manufacturing process and transportation solution that involves the use of fossil fuels or other inputs resulting in the emission of greenhouse gases.

Today, the production of essential materials such as steel, cement, plastic, aluminum, glass, fertilizers, amongst others, are a major contributor of greenhouse gases in the environment. Alternate technology solutions need to be identified for each of these production processes.

Although efforts are being made worldwide to develop such technologies and make them economically viable, it is uncertain how much time this effort will entail.

2. How much will investors contribute?

Every year since 2012, Larry Fink- Chairman and CEO of BlackRock, one of the largest asset management firms in the world- has written letters to the CEOs of the companies in which they invest. His 2018 letter “A sense of purpose”, called on CEOs to make 'Integrated corporate social purpose' their top business priority. It said the following: "Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate."

Increasingly, investors—both institutional and retail– want to align their financial portfolios with their own values, and they are pushing their asset managers to incorporate ESG (Environmental Social Governance) metrics into their investment decisions. ESG metrics are becoming increasingly central to investment strategy.

At the same time, it must be remembered that as participants in the capitalist system, first and foremost, there is a need to focus on returns- getting the right level of return for a given level of risk is a primary goal. It will involve a paradigm shift in thought process for CEOs to incorporate ESG metrics while achieving the current levels of returns and for investors to forgo immediate returns and focus on long-term benefits. It will be interesting to see how much investors will be willing to forgo to achieve sustainable returns.

3. How will governments regulate sustainability concerns?

Government regulations will be most crucial to encourage and ensure proper implementation of sustainability goals. Most governments have adopted country goals based on the UN SDGs (to be achieved by 2030). Further, businesses and NGOs are encouraged to align their goals with country-specific SDGs. In August 2020, 'Business responsibility and sustainability reporting' (BRSR) requirements were released, to be adopted by listed companies voluntarily for FY 2020-21 and mandatorily from FY 2021-22. A BRSR lite version was released for reporting by unlisted companies. It will be interesting to see how the government will use the BRSR reports to meaningfully engage with businesses to achieve the UN SDG 2030 target.

Further, it will be critical to see how governments penalize non-compliance. For example, one of the most popular recommendations is to implement a carbon tax on the emissions released during the entire lifecycle of the product. It is argued that the green premiums on sustainable products will be offset by the carbon tax on unsustainable products creating a level playing ground for all.

It will also be interesting to see how much governments will invest towards R&D programs to develop innovative clean alternatives and towards subsidizing green technologies.

4. Will consumer behavior and preferences change?

Today, there is a growing concern among millennials and the younger generations about environmental challenges, conservation of natural resources and societal issues. This has brought sustainability into the mainstream for consumers and organizations. However, the impact of sustainability on consumers’ actual purchasing patterns is yet to be seen. It is unclear how much green premiums they are willing to pay for sustainable products. Another aspect to be monitored will be whether consumers will moderate their overall consumption patterns.

(For more insights on the role of corporates in implementing sustainable

business strategies contact preeti@preetisuresh.com)