The transition to greener and cleaner technologies and management practices is not an easy one for business, and it is especially challenging for multi-industry, multi-national conglomerates.
Most large business conglomerates have the following features:
- A combination of businesses operating in different industry sectors : primary (raw material extraction), secondary (manufacturing and construction) and tertiary (services)
- A combination of old and new businesses
- Operations in multiple countries
For business conglomerates, the sustainability strategy flows from the top, following from the group-wide sustainability vision. Customizing the sustainability message of the top management to individual companies (discrete strategic business units) within the group is a challenge.
Companies within the same group, but operating in different industry sectors face different sustainability issues. While businesses engaged in raw material extraction such as mining, oil&gas, forestry, fisheries and agribusiness are faced with the problem of mitigating impacts resulting from unsustainable extraction, businesses in the manufacturing sector have to manage the impacts caused due toinefficient use of materials and energy and due to emissions and wasteemanating from their operations. Service industries operating in the IT, telecommunications, retail and financial services sectors seem to have small environmental impact (except energy and material consumption of their commercial installations) but, in reality, their impacts are quite significant – while the impacts of retail companies lie in their supply chains, those of the financial service companies arise out of the projects they finance or insure. In fact, being customer-facing, service sector companies have to be more cognizant of their environmental impacts.
Another challenge conglomerates face in making the sustainability switch comes when they have a mixture of old and new manufacturing units. Old factories face the classic problem of having been locked into decades-old technology and machinery, compliant with the regulatory requirements of the time when they were deployed. With time, however regulations are bound to get more stringent and transition to cleaner and more efficient technology either requires huge investment or retrofitting. Pre-empting change in regulation is thus a very important strategy to ensure smoother transition in the future. A similar problem is faced when a conglomerate purchases a business – the business brings with it a legacy of environmental performance which may not be easy to reverse.
Multi-national conglomerates have unique hurdles to overcome to make the sustainability transition. When a conglomerate has operations located in different countries, it has to be cognizant of compliance requirements specific to those countries. In such a case, it pays to go beyond compliance and be an industry leader in environmental performance – it is easier to apply consistent performance norms across all locations.
Notwithstanding their diverse challenges, large conglomerates are the ones who have the wherewithal to blaze a trail towards greater business sustainability.
More than three years ago, I wrote a policy paper exploring the business case for biodiversity offsets in India. Since then, the international discourse on biodiversity offsets has evolved at a feverish pace. At this point, it is important to look at the developments in policy and practice surrounding biodiversity offsets internationally and their implications for India.
Biodiversity offsets refer to the gamut of conservation actions (ranging from ‘averted loss’ activities such as strengthening or expanding protected areas and establishing corridors and buffer zones to more active ‘restoration’ interventions including reintroduction of species, removal of invasives and improved land management practices) that are undertaken to compensate for the adverse impacts on biodiversity of high-footprint development and industrial activities including mining, oil&gas extraction, construction of large-scale (ports, dams, power plants refineries, oil rigs) and linear (roads, railways, powerlines and pipelines) infrastructure. Biodiversity Offsets are a part of the mitigation hierarchy – the environmental management framework that allows the integration of biodiversity into the development project life-cycle.
Image Source: www.sustainableprosperity.ca
Required by the law in some countries but mostly undertaken voluntarily by corporates, biodiversity offsets are the last-resort option for addressing unavoidable impacts, after reasonable efforts have been made to avert and mitigate the impact. The objective of the biodiversity offsetting is often to achieve no net loss (NNL) and sometimes even a net gain of biodiversity, measured often in terms of species richness, extent of habitat and flow of ecosystem services.
As per speciesbanking.com (a global information clearinghouse for biodiversity offsetting, compensation and offset banking), as many as 45 laws, policies and programs pertaining to biodiversity offsetting and compensation are active in countries worldwide and 20 more are under development. More than 86,000 hectares of land has been purportedly conserved or restored through offsetting and payments to the tune of USD 1.8 to 2.9 billion are being made annually.
Just as biodiversity offsetting has found its way into national and state-level legislation, it is also becoming an important pre-condition for international project finance as most major lenders such as the IFC and international private banks mandate the adherence to the mitigation hierarchy. Where it is not mandated by law or the lending institution, biodiversity offsetting is being adopted voluntarily by businesses as a means to enhance reputation and gain a social license to operate.
However, no other conservation principle has polarized the conservation community as has biodiversity offsets. The proponents claim that the offsets allow the internalization of the environmental externality of biodiversity impact into development decision-making, arguing that some development is inevitable and when implemented in accordance with best practice biodiversity offsets can lead to real conservation outcomes at the landscape scale and provide the much-needed private sector boost to cash-strapped conservation finance. The criticism is equally convincing and scathing – offsetting is being seen as a ‘license to trash’ and an attempt at ‘commodification of nature’. As George Monbiot incisively puts it – “It makes nature as fungible as everything else. No place is valued as a place: it is broken down into a list of habitats and animals and plants, which could, in theory, be shifted somewhere else.”
Even if we were to dismiss the debate as a natural process, the actual examples of biodiversity offsets have met with limited success. Their on-the-ground implementation has been fraught with challenges. To cite a review of biodiversity case studies by Fern, ‘biodiversity offsets face a number of problems: 1) technical (not being able to effectively measure what is lost and gained), 2) governance (not enforcing the mitigation hierarchy or adequate standards and measurements, nor penalising failed projects) 3) socio-geographical perspective (the local and wider cultural value of nature) 4) financial (fundamental errors in the market logic of using ‘price’ to regulate destruction 5) Legal (evidence to show that biodiversity offsetting interferes in the interpretation of environmental and planning laws and due legal process).’
The regulatory compensatory mitigation regime in India continues to be a rudimentary one – in lieu of diversion of forest land the developer pays to the government the cost of afforestation of equivalent area of degraded land (Compensatory Afforestation or CAMPA). In addition the developer also pays an amount equivalent to the Net Present Value(NPV) of the forestland which is to be used for ‘natural assisted regeneration, forest management and protection, infrastructure development, wildlife protection and management, supply of wood and other forest produce saving devices and other allied activities.’ The fact that the even the recently-revised figure of NPV of a hectare of forestland ranges from a mere Rs 4.38 lakh to Rs 10.43 lakh (6900 USD to 16000 USD) is another discussion altogether. What’s more, Compensatory Afforestation Funds to the tune of Rs. 38,000 crore (and accured interest to the tune of Rs. 6000 crore) collected by the states from the user agencies are lying unutilized. The compensatory mitigation regulation in India and its implementation is still a long way from the international best practice in offsetting. At the same time, voluntary offsetting is all but non-existent. There is no denying that corporates do take up afforestation activities but is often more as a social responsibility activity than as a compensation for impacts.
With India being one of the fastest growing economies in the world and with conflict between development and environment escalating, the impact of development on biodiversity and its mitigation is set to gain increased prominence in environmental legislation. In fact, the term offsets has already crept in policy discussions. But India will have to be very cautious before adopting a policy on offsets. It will first have to assess whether the present Environmental Impact Assessment mechanism even begins to follow the mitigation hierarchy. Environmentalists have repeatedly slammed the EIA process in India as a mere sham. When the first two stages of avoidance and mitigation of impact are compromised, the very purpose of offsets gets defeated.
It’s important to remember biodiversity offsets come into play only in the case of unavoidable and residual impacts. Unless it has been determined without a shred of doubt that the impact cannot be avoided nor it can be mitigated through the environmental management plan, biodiversity offsetting will have no meaning. Lest we rush into offsets and it becomes another tool for justifying reckless development, we must tread carefully.
The failure was attributed in large part to insufficient finances. The same year, parties to the convention met in Nagoya, Japan (COP 10) to agree upon renewed goals to stem the burgeoning tide of global biodiversity loss, which according to a European Commission study, is costing the world economy USD 740 billion per year in lost ecosystem services. At Nagoya, the parties set for themselves the more ambitious and far-reaching Aichi Biodiversity Targets to be achieved by 2020 (as a part of CBD’s Strategic Plan for Biodiversity adopted during COP-10 in Nagoya).
The 11th Conference of Parties (COP-11) held in Hyderabad inherited from COP 10, the unfinished business of mobilizing financial resources for the Aichi Biodiversity Targets. During the conference the international commitment to fund the targets were doubled from USD 6 billion to USD 12 billion – the amount pledged still fell short of the investment required by an entire order of magnitude.
Funding for biodiversity conservation comes broadly from two sources:
- International flows of financial resources including both the Official Development Assistance or ODA (i.e. official aid from developed to developing countries – this includes both bi-lateral transfers and multi-lateral transfers e.g. those channelized through GEF) and the non-official funding provided by international NGOs and foundations
- Domestic funding including government budgetary outlay of various departments and funding from private sector
In its review of the progress towards the Aichi Biodiversity Targets, the CBD maintains that the funding gap continues to be serious. Over the past few years, the growth in Biodiversity-related ODA and GEF funding for biodiversity focal area has remained sluggish and the doubling of funding is nowhere in sight.
India has done pioneering work among the signatories in making a detailed assessment of its domestic funding for biodiversity. Although the MOEF budget for biodiversity has increased, the funds are clearly not enough to meet the national-level targets.
The sheer magnitude of the funding gap, both internationally and nationally, calls for raising funds from all possible sources. Private sector funding for biodiversity conservation offers a promising opportunity to bridge this gap. Countries have been exploring feasible mechanisms to mobilize this hitherto untapped source. Referred to broadly as Innovative Financial Mechanisms, the ones that involve private sector funding include Biodiversity Offsets and Payment for Ecosystem Services.
In 2013, India became the first country to mandate Corporate Social Responsibility(CSR) through its new Companies Act. The provisions of the act require all companies of a certain net worth/turnover/net profits to set aside 2 per cent of the annual net profits for CSR activities – an estimated 3 billion USD of capital will be generated by the 16,000 companies that come under the ambit of the Act.
Among the nine areas outlined by the Indian Ministry of Corporate Affairs, on which the CSR budget can be spent, one is ‘Ensuring environmental sustainability, ecological balance, protections of flora and fauna…’ – thus there is a clear mandate from the government that corporates invest a part of their CSR kitty on biodiversity conservation. The Companies Act, 2013 encourages companies to focus their CSR efforts in the local regions of their operation. Thus biodiversity conservation as a sector for CSR intervention becomes relevant for companies operating in areas of high conservation value and those that have a high-biodiversity footprint.
One modus operandi for making CSR investments in biodiversity conservation is through individual company-level projects, something that a few companies have already been doing voluntarily. The other method of operationalizing this is for a group of companies to pool resources to reach a scale, an idea for which there are provisions in the Companies Act.
Whatever the modus operandi, companies are expected to have a CSR strategy in place, specifying their geographies and issues of intervention. With companies reporting on their 2 percent CSR targets for the first time this year, it would be interesting to see which companies have included biodiversity conservation in their CSR strategies and whether the CSR spend can make significant contribution to the much-needed biodiversity finance in India.
The top management often questions the rationale for organization-wide employee sustainability training, given the fact that most companies already have full-fledged sustainability cells in place. Why do employees across functions need sustainability training is indeed a tricky question to answer. That training is a mandatory requirement under ISO 14000 – Environmental Management System should be a good enough reason for the companies who have gone for the certification. But the business case for organization-wide sustainability training goes much beyond compliance.
As per the EPA,
“There are two excellent reasons to train employees on environmental management and your EMS:
• Every employee can have potential impacts on the environment; and
• Any employee can have good ideas about how to improve environmental management efforts.”
In its white paper titled, ‘The Business Case for Environmental and Sustainability Employee Education‘, the National Environmental Education Foundation, USA has cited cases of companies such as Intel, Baxter and Lockheed Martin have used employee sustainability engagement as an enabler for their sustainability strategy. The white paper also highlights sustainability training as “an important factor in attracting and retaining employees particularly with a new generation of “Millenials” seeking jobs that are aligned with their personal values”.
Innovation is another opportunity presented by sustainability. Sustainability Spurs Innovation. Employees across functions engaged in sustainability can come up with innovative environmental management practices, leading the company to costs savings through resource and energy efficiency and streamlined processes. Moreover, sustainability awareness among employees of all functions and levels helps ensure better management of regulatory, financial and reputational risks associated with environmental impact. Awareness of sustainability issues also help employees pre-empt macro-economic, policy and market changes, especially those resulting from climate change and brace to manage them.
This brings us to another point – employees need to be engaged with sustainability at three levels i.e. awareness, training and competence. While the entire staff of a company must be imbued with sustainability awareness, training at a more operational level needs to be imparted to those who will be taking key tactical decisions for driving sustainability in their organization e.g. to procurement managers who will ensure green procurement or the finance personnel who will ensure sustainable finance. The third level i.e. competence is to be achieved by the senior management who take strategic decisions, form policies and steer the company towards their sustainability vision.
This implies that sustainability training needs to be customized to suit the needs of employees at different levels, in addition to tailoring it to the specific needs of the industry in which the company operates. Sustainability training customized to industry, employee grade and employee function can go a long way in ensuring that businesses survive and thrive in the changing times.
The economic meltdown of 2008 made it clearer than ever before that the consequences of
business operations can reach far and wide, affecting a range of stakeholders in significant ways. It was also felt that business schools had failed to sensitize future managers on how their decisions could have widespread economic, social and environmental ramifications.
A need to integrate sustainability into management education and research was palpable. Responding to this call for action, the United Nations Global Compact laid down the Principles for Responsible Management Education (PRME) to facilitate B-Schools in adapting their curricula, pedagogy and research to the new realities of doing business. Each addressing a different aspect of management education viz. Purpose, Values, Method, Research, Partnership, Dialogue – the six principles have sustainability at their very core. Thus the impetus for change also came from businesses who are increasingly looking for managers who can help them address social, environmental and governance concerns, which is something – that now businesses have come to realize – on which hinges their very survival and sustainability.
However, the vision of management education acting as a catalyst of business transformation and eventually a driver of sustainable development will remain a pipe dream unless sustainability is integrated into the very DNA of management education. Teaching sustainability as a separate subject or elective will relegate it to a secondary concern for managers. What needs to be done however is to look at all the aspects of management education through the lens of sustainability. In addition, immersive experiential learning is being seen as an effective pedagogical technique for making MBA students better understand the global realities and constraints in which they will operate and affect. There isn’t enough clarity on how this will be achieved by B-Schools and their faculty. But what is absolutely certain is that the entire exercise will shake some deep-seated assumptions about the prevalent paradigms of economic growth and capitalism. The 607 signatories of PRME from over 80 countries have initiated efforts to integrate sustainability in management education and have started sharing information on their progress. Beyond Grey Pinstripes has been publishing MBA rankings on the basis of the degree of integration of sustainability in them. All this augurs well for a systemic change in how business managers will be groomed and businesses will be run in the future.