Indian businesses will play a crucial role in championing climate change action while simultaneously integrating it into sustainable GVCs
During the COP26 summit in Glasgow in 2021, Prime Minister Narendra Modi announced India’s desire to achieve net-zero emissions by 2070. Global value chains (GVC)<1> exports account for more than 50 percent of global exports, so for any country to obtain resilient economic growth, they need strong linkages with GVCs. Despite being in close proximity to “Factory Asia,”<2> India lags far behind its competitors in its integration into GVCs and some of the impeding factors for this are climate action and its inability to attract huge Foreign Direct Investments (FDI). With increasing pressure from civil society and investors, many leading multinational corporations along with GVCs are trying to reduce their suppliers’ carbon footprints. India can leverage this by offering climate-smart, inclusive production and connectivity; this will also allow Indian businesses to play a significant role. Thus, decarbonising GVCs is important to not only bolster this net-zero transition but also achieve strong economic growth. This brief will focus on why Indian businesses will drive climate change action and enable India’s integration into sustainable and resilient GVCs.
With increasing pressure from civil society and investors, many leading multinational corporations along with GVCs are trying to reduce their suppliers’ carbon footprints.
According to the Deloitte’s Global 2022 CxO Sustainability Survey Report, more than 80 percent of Indian executives believe that the world is at a tipping point for responding to climate change and have hopped on the environmental, social, and governance (ESG) bandwagon. The world is relying more and more on businesses to make ethical choices and undertake measures to decouple growth from their environmental footprint. Today, climate change impacts companies in multiple ways ranging from physical risks like operational impacts from extreme weather to transition risks which arise from society’s response to climate change. So a transition to low-carbon solutions in business portfolios across industries can drastically reduce the global emission profile, lower climate-induced disruption, assist businesses in dealing with indirect emissions, and overall make businesses more sustainable. As mentioned by Anish Shah, CEO of Mahindra Group, “the idea of a new type of ROCE, i.e, ‘Return on Climate and Environment’ is becoming increasingly relevant with huge implications for not just how and what businesses produce, but also how they are valued in both societal and financial terms.” ESG scores serve as a strong matrix for demonstrating a commitment towards sustainability. Companies that are generating high profits but have low ESG scores are at risk of losing capital inflows, whereas companies that are making conscious decisions to reduce their carbon footprint are attracting significant investments from funds and foreign investors. These investments from funds and foreign investors can aid India in making its GVC linkages stronger and help in making further investments in climate-smart production. As noted by the G20 Sustainable Finance Working Group (SFWG), there has been a proliferation of commitments by private institutions to achieve a net-zero transition. Although these businesses have plausible decarbonisation plans, the lack of transition consideration in the current tools and approaches to align investments to sustainability goals prevents financial institutions from investing in much larger sectors of the global economy that are required to support the climate transition, including currently carbon-intensive businesses.<3> Here groups such as the SFWG can do work to help support the effective implementation of the commitments made by the private sector; a strong transitional framework by the G20 countries will not only bolster these investments but also help achieve stronger and sustainable GVC linkages. With India’s upcoming G20 presidency, it can and should push for a strong sustainable finance framework roadmap that aids the private sector in its transition to low-carbon portfolios.
Climate change impacts companies in multiple ways ranging from physical risks like operational impacts from extreme weather to transition risks which arise from society’s response to climate change.
Using India’s agriculture sector as a case in point, agriculture is the lifeline of the Indian economy. However, the sector only contributes 20 percent to the country’s gross value added (GVA), and in terms of agricultural global trade, India’s contribution is merely 3 percent; agricultural productivity in India is perilously threatened by climate change and the depletion of natural resources. According to an article published in the Harvard Business Review, global food demand is likely to increase between 59-98 percent by 2050, and factors like climate change will make it difficult to produce enough food. Thus, making it a dire need for Indian companies to start investing in climate-smart production to sustain growth and simultaneously increase India’s share in global trade. We can already see the benefits of investments in climate-smart production by looking at one of the Indian conglomerates—Imperial Tobacco Company of India Limited (ITC). ITC has made significant contributions to transforming the agriculture sector in India through its climate-smart programmes and adoption of advanced technologies such as the ITC Meta Market for Advanced Agricultural Rural Services (ITC MAARS). ITC’s strategic focus on climate-smart agriculture has led to strong export growth in wheat, rice, species and leaf tobacco; creating a new and sustainable revenue stream, whilst benefiting farmers. Today, programmes such as the ITC MAARS are a step towards building competitive agri value chains in India that are resilient and sustainable.
While agriculture is only one sector where climate-smart production can be useful to make India’s GVC linkages stronger. Other major Indian corporate giants such as Reliance Industries, Mahindra & Mahindra, and Tata Consultancy Services, etc. are also making significant investments in becoming carbon neutral. Such initiatives will improve overall connectivity and production processes and will also serve as strong examples for smaller firms to follow.
According to an article published in the Harvard Business Review, global food demand is likely to increase between 59-98 percent by 2050, and factors like climate change will make it difficult to produce enough food.
An overall shift towards carbon neutrality will also signal multinational corporations to set up plants and/or increase suppliers in India. Furthermore, it will make developmental institutes such as the International Finance Corporate make more investments in the climate space in the private sector in India while simultaneously acting as a catalyst for strong GVC linkages in the country. India's upcoming G20 presidency is another opportunity to encourage large-scale discussions on mechanisms to decarbonise supply chains and develop strong sustainable finance transition frameworks that can be an impetus to India’s net-zero transition. Therefore, contributions made by Indian businesses in the coming years will help make India’s net-zero transition goals achievable by 2070.
[1]Global value chains (GVCs) are the cross-border networks between lead firms and suppliers that bring a product or service from conception to market.
[2] Factory Asia is the name given to the concentrated manufacturing and supply chain hub in the Asia Pacific region.
[3] Ibid
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