- March 15, 2020
- Posted by: Shivani Chopra, CFA
- Categories: BLOG, In Conversation With
Post is as on 8th April, 2020
Interviewed By: Deivanai Arunachalam
Transitioning to sustainable business model
-Can COVID-19 pandemic teach us a lesson to bring resilient business continuity?
GDP growth has often been overemphasized as an indicator of a nation’s economic well-being. Quite like sizing-up an individual by how much he makes, merely in terms of money. The obsession for materialistic success blinds many. Governments and nations are no exception – after all, aren’t governments themselves composed of apparently successful individuals?
Over the last few decades many developing countries have witnessed impressive rates of economic growth.Thousands have been lifted out of extreme poverty. We live longer and better lives. Yet, how many of us are truly satisfied and happy?
While economic growth has been beneficial, the overemphasis on GDP needs rethinking.
More countries,such as Bhutan and New Zealand, are moving towards holistic sustainable living by including people’s happiness and the planet’s health in the equation. While we usually think governments need to take action, what about businesses? What can they do?
The United Nations ESCAP attempts to answer these uneasy questions in its 2020 Economic and Social Survey of Asia and the Pacific.
The United Nations adopted the Sustainable Development Goals (SDGs) in 2015 – a blueprint to realize a better future for everyone. The UN emphasizes the need to achieve these interconnected goals related to poverty, inequality, climate change, peace and justice, by 2030.
We spoke to Jyoti Bisbey, Lead Development Finance and Economics Specialist at the United Nations ESCAP on an assignment from the World Bank Group. Her research suggests how sustainability can be mainstreamed into businesses’ financing and investments decisions by adopting the Environmental, Social and Governance (ESG) framework during these unprecedented times.
What is ESG? Which ESG elements are examined before making an investment decision?
Jyoti: ESG stands for Environment, Social, Governance factors, which when combined constitute sustainability.Today investment managers in order to be called sustainable, screen companies based whether they are ‘green’ or not. This is only the beginning. As the market moves towards a better understanding of sustainability, companies need to follow not only green but also good labour and governance practices such as employment benefits, working conditions, health & safety, diversity and inclusiveness. This has become even more relevant today as we face an unprecedented health crisis affecting millions of workers thinking about their next pay check and safety nets. As number of investors and regulators who seek information on ESG factors, grows, more fund managers are increasing transparency and disclosing fund activities. But we have a long way to go.
How is ESG going to help companies become sustainable?
Jyoti: Currently, the primary focus is on the ‘E’ of ESG. This is because there is more information and normalization of data available to measure and track activities which directly impact the environment. These are called ‘Scope 1 and 2’ level emissions according to the Greenhouse Gas (GHG) Protocol. However, even these are underestimated as the true cost of carbon is not included in the production process. Any measure of profit (broadly defined as revenues minus costs) is dependent on the estimate of costs. We do not know the true cost of many of our natural resources because we do not price the externalities. Carbon is an externality. Lately companies like Mahindra & Mahindra ($10 per metric ton of CO2 emissions) and Infosys ($10.50 per metric ton of CO2 emissions) have come up with an internal carbon pricing. Carbon pricing is the best way to reduce companies’ carbon footprint and report on GHG emissions for the “E” in ESG.
What are the next steps in encouraging investment within the ESG framework?
Jyoti: Let’s take a coffee company and look at the entire value chain. Investors should be provided with information on whether wastewater was disposed correctly. On whether good labour practices are prevalent at the plantation. This way, the process of the value chain – from farming coffee beans, till the end consumer who purchases her morning coffee can be scrutinized. We need to implement reporting and disclosure standards that facilitate release of such detailed information along with an agreed set of standards for ESG.
There are several global financial initiatives such as the UN Principles for Responsible Investment (UNPRI), IFC’s Sustainable Banking Network (SBN), Global Sustainable Investment Alliance (GSIA) etc. Investors and companies often wonder which model to follow. India’s financial regulators –RBI and SEBI can adopt and endorse financial regulation on ESG and establish protocols for sustainability reporting. The regulator must define which standard will fit each of the three ESG categories.
Once a standardized regulation is established domestically, the ESG practices should be harmonized across countries so Indian businesses have a common framework.
What can CFA Society do?
Jyoti: It is heartening to note that CFA Institute has incorporated ESG in it curriculum. CFA Society and members can help in three ways: First, think about how our financial system can adopt climate risks in financial reporting and disclosures. Second, what kind of analytical tools can be developed to support companies, especially the small and medium enterprises in understanding pricing of externalities? Third, CFA society members who head investment companies must include ‘purpose’in the traditional profitability model, transitioning from a model based solely on profit maximization to one based on purpose and efficiency. This requires moving from a shareholder to a stakeholder approach, where a company operates on ‘do no harm to the people and planet’ basis.
Link to the survey: https://www.unescap.org/publications/economic-and-social-survey-asia-and-pacific-2020
About Jyoti Bisbey
Jyoti Bisbey is the Lead Infrastructure Economics and Finance Officer in the Macroeconomic Policy and Finance for Development Unit within the United Nations’ Asia headquarters in Bangkok, Thailand. She is currently on an external assignment with the UN from the World Bank Group. Jyoti is leading the dialogue on SDG 2030 Agenda economics and financing issues for Asia. She authored the theme chapters of the flagship report—Economic and Social Survey 2020—on Constraints and solutions for stakeholders towards Sustainability and published papers on Enhancing infrastructure efficiency and Financing sustainable infrastructure through local capital markets. She has also authored many policy briefs, blogs, three papers in an Infrastructure Financing bookand presented on topics such as SDGs and Environment, Social and Governance (ESG) investing, and Financing sustainable cross border infrastructure investments. Recently, Jyoti was interviewed by the CFA Society of India and serves as the Associate Editor of the Journal of Infrastructure, Policy and Development at the Lee Kuan Yew School of Public Policy, part of the National University of Singapore.
At the World Bank, Jyoti was with the Infrastructure Finance, PPPsand Guarantees group while working at the Central Asia, China, and Mongolia Transport Cluster to explore innovative financing in the region. She led the dialogue on PPPs in Brazil, Kazakhstan, Tajikistan, Turkey, Sri Lanka and generally served as a PPP focal point in the Eastern Europe and Central Asia region and previously in Vietnam, Russia, Uruguay, Mozambique, Madagascar, Kenya and Ethiopia. Jyoti represented the World Bank in discussions with other multilateral development banks (MDBs) on defining Private Capital Mobilization, which is the core of the Billions-2-Trillions (B2T) agenda. The work won the World Bank President’s Excellence Award. Her recent achievements have been leading the development and implementation of the PPP Certification Program ‘CP3P’, financial recovery planning for Vietnam Electricity, inland water transport PPPs in Latin America, construction bond financing using World Bank intermediation, and structuring PPPs in the irrigation subsector. Her work has focused on a variety of infrastructure investment project phases from transactions structuring to implementation and from financing policy to program development, financial viability assessments, and structuring of PPP options.
Jyoti holds an MBA from George Washington University and an undergraduate degree in Mathematics from St. Stephens College in Delhi. Outside of work she enjoys running and spending time with her family.
Jyoti can be contacted at LinkedIn: jyotibisbey and Twitter: @BisbeyJyoti.