War and ESG

The Russia-Ukraine war has thrown up several issues around ESG. Given that the EU is neighbour to the warring parties, the impact of war is direct. But the war also has ramifications around the world. So let us look at some implications for ESG.

Source: Pixabay/Pexels

Emissions: The recent IPCC report highlighted the urgency to reduce GHG emissions stating that the window is “brief and rapidly closing.” The war has made this harder to achieve – all the munitions going off add to GHG emissions significantly. This will make the task of GHG reductions more challenging.

Investments: ESG investments have grown rapidly in the past couple of years. The war has led to a spike in oil prices and windfall gains to many oil companies, and consequently, oil stock has done well. However, with high inflation and investor expectations of higher returns, the lack of oil stocks puts fund managers, particularly growth funds, in a tight spot. This is exacerbated by the need to reduce holdings of Russian stocks in the portfolio.

Energy sourcing: While the EU has been a climate champion, the war has shown some kinks. The high dependence of EU countries on gas is of concern. There are no easy substitutes. While it is easy to say that they should shift to renewables – it requires massive investments and time. The shift is necessary.

Another worrying line of thought is emerging that the European countries might slow on climate change while rejigging their energy sources.

While the impact of war is more direct on the environment, there are implications for social and governance aspects. For example, take the refugee crisis. The refugees will need employment and housing. And, when the war is over, rebuilding will present opportunities and challenges.

Companies will have to deal with high inflation, constrained supply chains, and recovering from pandemic economic consequences on the governance front. As a result, the need to focus on net-zero will become even sharper.

Recycling Cosmetics

Photo by Jhong Pascua from Pexels

Every household has a cabinet in the bathroom that is overflowing with cosmetics. Earlier cosmetics were the preserve of women. However, increasingly men are taking to cosmetics leading to competition for the space in that cabinet. 

The global cosmetics market was valued at $380.2 billion in 2019 and is projected to reach $463.5 billion by 2027. A staggering 51 billion pieces of cosmetic packaging is produced each year. 

There has been a lot of debate about the harmful chemicals used in cosmetics. While those issues are getting addressed, there are still multiple issues with cosmetics:

  1. Packaging: This is the most widely known problem. Cosmetic packaging consists of plastic, steel, glass, etc. Discarded packing often contains remnants of the products – dried and unused materials. These are difficult to separate and are not easily recyclable.
  2. Discontinued products: These are returned by stores and sent to landfills.
  3. Product waste: Testers, unsold products and returned products. All these again go to the landfill.
  4. Chemicals: The chemicals used in cosmetics can be harmful when incinerated or added the soil in landfills.  

The industry is now moving towards sustainable actions. L’Oréal has pledged to make 100 per cent of its packaging recyclable or bio-based by 2030. Unilever, Coty and Beiersdorf have pledged to make sure plastic packaging is recycled, reusable, recyclable, or compostable by 2025.

Much of the work on recycling has centred around cosmetic companies that have tied up with Terracycle to recycle packaging. However, an interesting innovation is by an American beauty company, Izzy. Izzy sells beauty products that are zero waste. It provides beauty products that are reusable and recyclable. Izzy beauty products come with no outer packaging and are shipped in reusable mailers manufactured from upcycled materials. Its stainless steel tubes are designed to be cleaned and refilled. The company sends a reminder every 90 days for a refill, and the refill is shipped in a reusable shipper. Thus, this eliminates waste and promotes reuse.

The cosmetic industry can do a lot to reduce environmental degradation. Therefore, an increased focus on recycling and becoming circular becomes critical.

Plastic Eating Super Enzymes for a Circular Economy

Photo by Catherine Sheila from Pexels

Invented in 1907, plastics have grown in popularity for their convenience and disposability. However, plastics are now becoming a cause for concern due to its poor degradability.

The scale of the problem is large. Researchers estimate that since the 1950s,  more than 8.3 billion tonnes of plastic has been produced. About 60% of that plastic has ended up in either a landfill or the natural environment. Of this, much of the plastic ends up in oceans and it is estimated that plastic will outweigh all the fish in the ocean by ocean by 2050.

Only about 9% of all plastic waste is regenerated. So, what happens to the rest. A recent story piqued my interest. A handful of microbes have evolved with the ability to “eat” plastics. These microbes break down the component molecules of the plastic. You may ask, this is an old hat, so what’s new. While the first plastic-eating microbe was discovered in 1990s, there has been steady progress in the field. They’ve now evolved to the bacterium that uses plastic as their sole food and energy source. Researchers are, now, creating industrial-scale super enzymes that could eat PET  six times faster than earlier. Scientists are looking at microbial DNA from a range of habitats. In areas with high levels of plastic pollution, the researchers found that the microbes were more likely to have enzymes with plastic-degrading tendencies. One study has found a soil bacterium that feeds on some components of polyurethane.

Pilot projects have started utilising these technologies. For instance, the University of Portsmouth has set up Revolution Plastics, which aims to forge links between academics and industry. Carbios, a French biotechnology company, runs another project.

The main advantage of plastic-eating enzymes is that it makes it possible to recreate plastic to the highest quality. This is unlike recycling, where the quality of plastic degrades after every round of recycling. Thus, these advances are a boon to the circular economy.

The Value-Action Gap and Sustainability

Awareness of climate change, global warming and environmental risks among people is increasing by the day. Many surveys have shown that people prefer greener or sustainable alternatives to current products. However, these preferences or intentions often do not translate into consumption, lifestyles, or travel patterns. 

On the flip side, companies also do the same. According to a study published by Deloitte recently, 63% of C-suite executives worldwide recognise the need for businesses to take climate action. However, only a fifth of the companies are actually taking decisive steps on sustainability. 

This discrepancy between stated beliefs and behaviours is known as Value-Action Gap. First, let us examine how stated beliefs come about. There are three possible causes:

  1. The value system — a genuine desire to do something for the environment.
  2. Peer pressure makes you look good in front of your friends and colleagues.
  3. The role of the influencers – prominent people or role models who espouse sustainable causes.

So, what leads to the value-action gap

1. Information deficit: There is often an information deficit facing the customers. Which brands and products are truly “sustainable?” Which certifications are important? Which materials are superior? 

From a company’s perspective finding the right technology for emission reduction would be an information issue.

2. Costs: There is a search cost associated with finding sustainable products. Psychological costs (stressing about the purchase) and monetary costs (going to the right store) impact decision making.

Companies, when faced with ESG challenges, face similar costs.

Reducing the value-action gap requires a reduction of these costs.

The move to sustainability cannot be achieved without attention to the value-action gap. Three actions can help reduce the gap: increasing the customer’s/company’s capability or the company, motivating them towards intended behaviours, and providing opportunities to improve behaviours. Policymakers need to account for this while creating policies aimed at creating a sustainable or circular economy.

Budget 2022 and ESG

Here is my quick take on budget announcements related to ESG.

  1. Swappable batteries: The government proposes to bring a battery swapping policy. This will enable people in in urban areas who may not have charging facilities to utilise their electric vehicles. While this is late in coming, it is a welcome move.
  2. Sovereign green bonds:  In order to reduce the carbon intensity of the country the finance minister has proposed the issuance of sovereign green bonds as a part of the government’s borrowing programme. This will bring in much needed funding into the country for its public sector. Private capital will now have to increase their funding as well to meet the net zero challenge.
  3. An amount of Rs. 2,217 crores for 42 urban centres with a million-plus population has been set aside for tackling air pollution. The action on these allocation will need to be seen.
  4. It is proposed to launch a Hydrogen Energy Mission in 2021-22 for generating hydrogen from green power sources. This is really the need of the hour.
  5. To give a further boost to the non-conventional energy sector, it is propose to provide additional capital infusion of Rs 1,000 crores to Solar Energy Corporation of India and Rs 1,500 crores to Indian Renewable Energy Development Agency. These are welcome.
  6. The action plans for ten sectors such as electronic waste, end-of-life vehicles, used oil waste, and toxic & hazardous industrial waste are ready. This will be supported by active public policies covering regulations, extended producers’ responsibilities framework and innovation facilitation. Again, these are really needed to move forward on circular economy.
  7. Creation of Energy Service Company (ESCO) business model to facilitate capacity building and awareness for energy audits, performance contracts, and common measurement & verification protocol. This will be useful in urban centres.
  8. Promoting agroforestry and private forestry. This will help in increasing our green cover.
  9. Rs 19,500 cr allocation for PLI manufacture of solar PV modules. This will promote PV modules production in India and should promote solar expansion.
  10. An increase in the customs duties on wind and solar infrastructure import and the reverse bidding process requires companies to provide projects at lowest cost which is quite contradictory. 
  11. Promotion of greener public transport through special mobility zones with zero fossil fuel policy. This will give a fillip to sustainable transporatation.
  12. Thermal Power Plants are mandated to use 5-7% biomass pallets. Supports reduced GHG emissions.

To my mind, one of the misses of the budget has been the setting up of carbon budgets and carbon markets. These are the need of the hour.