Environmental Sustainability – Business Case for Indian BFSI sector
The role of Banking, Financial Services and Insurance (BFSI) sector towards sustainability has evolved globally from corporate philanthropy to a recognized means of value addition for stakeholders. This article explores the business risks and opportunities for environmental sustainability based on Global BFSI best practices, and create a case for sustainability for Indian banking and financial institutions
Globally, Banking and Financial Services and Insurance (BFSI) sector institutions have taken a lead in defining the new-age sustainability paradigm, driven by global concerns of sustainability, increased customer expectation, and newer market opportunities. Also, BFSI institutions are uniquely positioned on account of their role as advisors, lenders, investors and insurers to create a tangible impact on global sustainability. Climate change has emerged as one of the chief sustainability issues facing the world in the 21st century and the BFSI sector leaders have pioneered efforts in this space, creating the next generation standards for responsible banking practices. However, there is a marked gap in the performance of Indian banks performance with respect to their global peers, with none of the Indian banks featuring prominently with respect to environmental sustainability on global forums.
It is interesting to note that a few Indian BFSI organizations have already begun working in this space, but as yet lack the competitive rigor of their western counterparts. With India’s emergence as a key stakeholder in international climate change discussions, global watchdog organizations are already keeping a tab on the sustainability performance of Indian corporate organizations, including the BFSI sector. In times when Indian banks are fast wearing the mantle of “Global Banks”, this is both a risk, as well as an opportunity to explore, with companies which take a lead expected to be hailed as pioneers and leaders in the space. The following sections analyze the global best practices followed by leaders in the industry, specifically in the environmental sustainability domain, and charts out a business case proposition for incorporating the same into the gamut of corporate strategy for Indian BFSI.
Drivers for Environmental Sustainability in BFSI sector
The fundamental first step in defining a business case for Environmental sustainability is identifying the key drivers for sustainability for an organization. Sustainability issues are typically very specific to every organization, and therefore it is not easy to identify a cookie-cutter approach for managing the same. However, based on the global best practices shared by BFSI industry, the key primary drivers/focus areas can be categorized under four broad headers:
I. Bottom line pressures on operational efficiency
II. Trust and Responsibility – driven by stakeholder expectation
III. Risk and compliance with respect to Government regulations, human rights issues, etc.
IV. Participation in new markets (CDM, CRC, etc.), leveraging on Government stimulus and incentives
The illustration above highlights the key initiatives undertaken under each of the four key drivers for sustainability. Environmentally sustainable operations inevitably involve energy and resource usage optimization, thereby creating a case through immediate financial benefits. Stakeholder pressure in terms of demand for measurement and performance reports against key sustainability parameters has increased over the last decade, driven by growing awareness and also concerns regarding effect of anthropological activities on the environment. This has encouraged organizations to voluntarily start acting on their sustainability prerogatives. In the forward looking economies, these have been converted into formal rules and regulations, mandating the operating enterprise to manage their environmental impact. This coupled with environment watch dog organizations has created unprecedented pressure on organizations to gravitate towards sustainable business practices. Finally, there have been a large number of incentives and rebates in the field of sustainability announced by governments around the world for encouraging actions by enterprises, further promoting initiatives in the space.
Defining Leadership in Environmental Sustainability
Driving Sustainability through Operational Efficiency Prerogatives
Global Best Practices: It is easy to see that operational efficiency creates an immediate financial business case for the organizations. This was a particularly attractive proposition during the recent economic slowdown, and has continued to be a top priority even in the fast recovering economy. It is not surprising therefore to note that organizations which have incorporated these measures have also benefited tremendously through the cost reduction resulting out of increased operational efficiency, on top of the obvious sustainability benefits.
Most progressive BFSI organizations have announced public targets for reducing their carbon emissions, and many have already met or exceeded the same through incorporation of various initiatives. The table below shows the public GHG emissions reduction targets as announced by various BFSI organizations. Since more than 90% of GHG emissions by BFSI organizations (scope 1 and 2) are attributable to energy consumption (primarily electricity), most emission reduction measures deal with energy efficiency. These measures lead to significant cost reduction too, as shown in the table below where a hypothetical 5% electricity energy efficiency measure is seen to contribute more than USD 10 Million in cost savings annually. The energy efficiency measures typically have a payback of 2-3 years, and therefore present an immediate business case for investment and action.
Table 1: GHG Targets of top BFSI companies (Source: Public disclosures on Carbon Disclosure Project for the year 2010)
The most popular energy efficiency solutions are in the field of:
1. Building Energy Efficiency
- Energy efficiency through building automation and retrofit controls
2. Green IT
- Use of energy efficient IT infrastructure, and methodologies like server virtualization and consolidation in the data centers
3. IT for Green
- IT enabled efficiency practices – energy and sustainability monitoring, control and reporting
4. Green Buildings
- Adhering to energy efficient building codes (like LEED) for all new construction
Indian Scenario: Indian financial services organizations could look at this option to kick start their ‘green’ journey, and utilize the financial benefits accrued through these initiatives to fund more programs. While it is true that some Indian banks too have looked into this opportunity, the level of rigor falls far below their counterparts in the developed economies. A more rigorous approach towards this would ensure reduction in GHG emissions while also easing up bottom-line pressures.
Winner Approach: A balanced plan across these levers provides an opportunity for an immediate business case for sustainable practices in the BFSI domain, and has already been explored and perfected by the leading organizations. The monetary savings accrued through these projects could be used to fund bigger sustainability programs, as also auxiliary initiatives like creating a framework for better sustainable reporting and communication, which by themselves might not present a direct financial business case, but in the overall scheme of things help in positive growth of company’s brand equity.
The winner approach therefore is to create a self-sustaining initiative within the organization, satisfying the business need for a viable business case and also effectively managing the core sustainability prerogatives for the organization.
Driving Sustainability through Corporate Responsibility and Branding Prerogatives
Global Best Practices: Globally, BFSI sector has been leading the sustainable enterprise movement, and has pioneered multiple principles and initiatives in the space. It is therefore no surprise that BFSI is also the leading sector when it comes to participating in various public sustainability disclosure forums like the Carbon Disclosure Project and adopting the latest sustainability standards like the Global Reporting Initiative’s sustainability reporting guidelines.
Figure 1: Sustainability Reporting Trends in BFSI (Source: Carbon Disclosure Project Global 500 2009 report, www.globalreporting.org)
On top of these, there are multiple BFSI sector specific sustainability principles, which are adopted and in some cases even pioneered by leaders in the industry. For e.g., the Equator Principles are a set of guidelines, based upon the performance standards and guidelines from the IFC (International Finance Corporation), the World Bank's private sector lending arm for private banks to assesses and mitigate sustainability risks in project finance. Banks use the Principles to guide internal operating procedures for transaction for specific projects. Other examples include Climate Principles, Carbon Principles and UNEP Finance Initiative amongst others.
The sustainability standards and principles have evolved into fairly mature ‘performance indicators’ and ‘guidelines’, and consistent performance on these indices helps BFSI organizations in enhancing their reputation and the trust of their stakeholders.
Indian Scenario: The picture in India though is quite the opposite, with BFSI surprisingly not actively engaged in any of the frameworks discussed above. For e.g., only 3 out of 43 GRI reports in 2011 were from the financial sector (Source: www.gri.com) – a 7% share only. This is also a reflection of the fact that given the levels of sophistication achieved by the Global BFSI organizations in managing their sustainability, Indian Banks need a lot of catching up to do before they can compete on levels already established as de-facto global standards.
Driving Sustainability through Risk Mitigation and Compliance Prerogatives
Global Best Practices: Trust and reputation are highly respected assets for any successful organizations, especially the BFSI sector which is now looking to consolidate its position post the world economic slowdown.
A major reason for the proactive steps taken by BFSI in the developed world is the pressure posed by Non-Governmental Organizations against alleged ‘perpetrators’ of climate change, and the ensuing impact on brand image, a commodity rated at a special premium in the sector. Also, the upside of performing well is global recognition and an opportunity to stand out and earn stakeholder confidence by pledging one’s commitment towards sustainability. The illustration on the right brings these two points out through examples.
Multiple global watchdog organizations have taken it upon themselves to both publically felicitate and denounce organizations based on their performance against their sustainability prerogatives. There have been multiple cases of BFSI organizations having to accede to the demands placed upon them by these organizations, and have lost considerable reputation points with their stakeholders in the process. Most progressive BFSI organizations have therefore started to consciously drive sustainability initiatives with a view to curbing these risks. In this process, they also stand to gain through public recognition on forums awarding corporations working towards a sustainable cause, and therefore end up turning a reputation risk into an opportunity to enhance their brand image.
Indian Scenario: Indian organizations have traditionally not faced these issues in the past, but there have been developments in the last two years that would merit a more concerted effort in this regard. While CDP and GRI scores/grades are becoming commonplace indicators for measuring the sustainability quotient of organizations even in India, organizations like BankTrack have actively started scrutinizing the basic financial activities of Indian banks against sustainability parameters, openly calling out potentially environmentally harmful investment decisions under their ‘dodgy deals’ section.
BankTrack is obviously not alone in this, and the bottom line is that Indian banks are also now coming under the scrutiny of the international climate change watch dog organizations. Given the already high levels of international scrutiny over India on various sustainability issues, it might only be a matter of time before Indian organizations are also universally asked to report on their sustainability prerogatives.
It is therefore not only a ‘good-to-do’ practice, but also a strategic imperative for Indian BFSI to start working on mainstreaming sustainability into their core business practices – ensuring protection against potentially damaging litigations and continuing stakeholder confidence.
Winner Approach: As sustainability becomes more and more mainstreamed, the rigor expected from organizations in this regard is bound to only increase in the future. The winner approach therefore is to create a formal sustainability setup within the organization with the express mandate of managing the various sustainability mandates for the company. This would ideally need to flow from the top-most management in the form of a ‘vision statement’ and realized at the ground level through active participation of all concerned stakeholders. Besides this, a concerted approach towards communication of targets and activities with regards to sustainability, and a strong working relationship with the various ‘pressure groups’ towards collaboratively working on common sustainability issues would ensure that sustainability becomes a competitive advantage for the organization.
Driving Sustainability through New Business Opportunity Prerogatives
Global Best Practices: Sustainable business practices have led to creation of new business opportunities. The BFSI sector firms, owing to their position as the chief lenders and therefore drivers of economy, play a major role in promoting novel initiatives. This therefore presents an opportunity for enhanced or even an alternate revenue stream. There are multiple incentives offered by the Government for promoting sustainable practices and the same also provide a compelling business case for sustainability interventions in the BFSI sector. The graphic below shows how global BFSI organizations have leveraged upon sustainable business practices to enhance their top-line.
Figure 2: Environmental Sustainability - New Business Opportunities for BFSI (Source: Bank websites and public disclosures)
Indian Scenario: Similar opportunities present themselves in India too. With the announcement of National Action Plan for Climate Change (NAPCC) and the ensuing climate change missions expected to cost an estimated INR 44,000 Crores, Indian BFSI industry is uniquely poised to tap into this emerging market through new solutions like green financial instruments. This would also directly contribute towards the larger sustainability prerogatives for the organization while creating alternative streams of revenue, hence creating a powerful business case for the same.
Winner Approach: The winner approach is in identifying all the possible new opportunities, and then translating the most relevant options into tangible business propositions, some of which are outlined in the illustration below.
Multiple opportunities exist across financial derivatives, project financing, availing government incentives and even creating new business lines (Wells Fargo being a primary example of this). It is evident that this is a fairly technical space, and therefore would require considerable expertise and experience in building these niche financial solutions. It will clearly help if a bank has had a track record of performing well in the field of environmental sustainability, thereby lending credibility to its intentions and reinforcing the trust of the stakeholders.
Summarizing, effective communication of these initiatives and sound implementation of the measures would help ensure both additional revenue stream and positive branding for the organization.
The role of Banking, Financial Services and Insurance (BFSI) institutions towards sustainability has evolved globally from corporate philanthropy to a recognized means of value addition for stakeholders. With increased anticipation on new regulations, stakeholder awareness and peer pressure; banking and financial institutions have started addressing sustainability aspects, i.e. energy, environment, water and waste management, along with mainstream business operation. With the recent focus on environmental sustainability, global BFSI sector leaders have pioneered efforts in this space, creating the next generation standards for responsible banking practices.
Indian Banks have of late shown intent on striving towards becoming more sustainable through public commitments and disclosures, but have by and large lagged behind their global counterparts. It would therefore need to analyze the primary drivers behind the global environmental sustainability movement, chief among them being operational efficiency, risk and compliance, corporate responsibility and brand image and new market opportunities. This would need to translate into a corporate level vision for managing sustainability at group level followed by creation of a strong internal sustainability setup to translate this top level vision into practical reality. Such actions would help justify the stature of Indian Banks as responsible, global enterprises, and also reinforce India’s global stance on the issue of climate change.
The author Snehil Taparia has been an entrepreneur in the energy and sustainability space for a few years before joining Wipro and is currently working with Wipro EcoEnergy as Consultant in the Global Enterprise Energy Management function. The views expressed in this article are the author's own and do not necessarily represent those of any other organization. The author would like to thank Mr. Bipin Paracha and Ms. Veena Padmanabhan for their insights and inputs on the article. <!--[if gte mso 9]>