This action brought global attention to ESG and its significance in the business world. In the WEF’s virtual meeting in January 2021, the emphasis was on ‘better’ business which indicates that business should shift from creating value only for shareholders to creating value for all stakeholders, including employees, suppliers, customers, communities and the environment.
At the 50th annual meeting of the World Economic Forum (WEF) in January 2020, 140 of the world’s largest companies committed to measure and report their performance against environmental, social and governance (ESG) indicators, and track their contributions towards meeting the United Nation’s Sustainable Development Goals (SDGs) consistently. This action brought global attention to ESG and its significance in the business world. In the WEF’s virtual meeting in January 2021, the emphasis was on ‘better’ business which indicates that business should shift from creating value only for shareholders to creating value for all stakeholders, including employees, suppliers, customers, communities and the environment.
ESG performance would be higher and easier to achieve for companies in the services sector, particularly for information technology (IT) and financial services, as the direct environmental and social impact in these sectors due to business operations are minimal. However, companies involved in manufacturing activities such as metals and mining, oil and gas, thermal power generation would have lower ESG scores.
Traditionally, such companies follow a linear model of work which involves extracting natural resources to make products. Such products are used for a limited period of time before being discarded as waste. This model is often referred to as the ‘take-make-dispose’ industrial model.
However, there are two major issues with this model which are becoming increasingly critical ‒ increased environmental degradation and impending resource scarcity. These issues are exposing companies to increased climate risks and volatility in supply chains.
In such a context, it is imperative for businesses to adopt a ‘circular’ model. A circular model revolves around – i) using resources efficiently and prioritising renewable inputs, ii) maximising a product’s usage and longevity to extract the maximum value, and iii) recovering and reusing by-products and waste to manufacture new materials or products.
Businesses would need to review their entire value chain to start identifying opportunities for innovation in each of the above stages. For example, using resources efficiently could translate into businesses evaluating their actual consumption of water across the whole life cycle of their products. This includes direct water usage which would be high in the case of beverage industries and indirect usage which includes water used in production processes such as cooling power plants, extracting oil and gas, or mining.
Such an evaluation of the water footprint of a business would be the first step towards addressing risks such as over-extraction of groundwater or surface water, and losses through inefficient wastewater reuse.~
A recent study analysed water data from 30 of the largest US cities and found that the true cost of water paid by consumer companies was three to five times greater than the price they currently pay, once direct and indirect costs of water shortages and other risks were incorporated.
The principles of circular economy can be used by businesses to achieve better ‘water stewardship’ which is defined as ‘the use of water that is socially and culturally equitable, environmentally sustainable and economically beneficial, achieved through a stakeholder-inclusive process that includes both site- and catchment-based actions.’ Adopting water stewardship practices acknowledges that water is a shared resource and hence, water risks are shared risks that everyone in a catchment area will inevitably encounter. Such practices are becoming critical for businesses as the levels of water stress and number of climate events increase across the country.
If we look at circular models in specific industries like FMCG, it could begin with designing products using raw materials that are renewable, bio-based or recycled. For example, many brands have started using recycled plastic pellets for manufacturing plastic required for packaging instead of using cheaper virgin plastic. Using recycled material also provides an opportunity for building greater resilience as local suppliers would help shorten supply chains, which is particularly pertinent in a post-COVID world. India benefits from a robust informal economy in the recycling sector which needs to be capitalised upon by establishing supply chains with complete traceability, thereby helping businesses meet their Extended Producer Responsibility (EPR) targets such as collecting 100% of the plastic they use.
Today, it is impossible to completely avoid plastic use and plastic bans have failed in many parts of the country because of the same. In a post-pandemic world, plastic use will continue to be high, and therefore, integrating circular business models in operations would become even more important for businesses to reduce their environmental impact due to plastic usage. Several businesses have undertaken pilot initiatives that bring together key stakeholders to achieve circularity in plastic production and usage. For example, some FMCG brands have undertaken plastic initiatives at the city level as pilot projects which bring together the city authorities, local NGOs and waste management agencies. However, scaling up such initiatives is imperative for the benefits of the same to accrue to businesses.
Circularity in the electronics sector could start with manufacturers recycling e-waste from mobile phones, computers, copy machines, monitors, household appliances and other equipment from which metals like rhodium, copper, lithium and others can be extracted. Approximately 5,000 gold, silver, and bronze medals were awarded to athletes during the 2021 Summer Olympics in Tokyo and they were manufactured entirely from metals recovered from e-waste collected between April 2017 and March 2019, as part of the Tokyo 2020 Medal Project.
Another method of bringing in cost efficiency and circularity is urban mining, which is the process of recovering raw materials from a city’s discarded products that are normally considered and treated as waste (such as electrical and electronic waste, or construction and demolition waste). A study on e-waste recycling in China found that extracting metals such as copper, lead, steel, aluminium, gold, and silver through urban mining is almost ten times cheaper than extracting metal from mines. Urban mining becomes even more critical for a country like India considering its significant dependency on imports due to the lack of metals, as well as the increasing use of electronic products which would ultimately lead to increased e-waste.
The Indian recycling industry is ahead of many western countries when it comes to urban mining processes, with significant levels of reuse, repair, refurbishment, and resale of discarded electrical and electronic equipment in the informal sector. However, there is a need for providing regulatory support to the informal sector as well as capacity building and technology adoption to ensure that the recovery of materials is undertaken efficiently, at a lower cost, without wastage or posing any health hazards to the workers or the environment.
Integrating such circular principles in business models would enable businesses to respond with agility to investors, regulators and consumers who are increasingly expecting them to contribute to the common good. However, companies cannot act independently to adopt circularity in today’s world where each company’s business model is interconnected with various other businesses. Concepts like EPR have become pertinent in this context where a company can pass on its expectations to its suppliers, who in turn can extend it to their suppliers. Such integrated supply chains are critical to ensure that circularity adoption is successful.
In May 2021, the Securities and Exchange Board of India (SEBI) mandated Business Responsibility and Sustainability Reporting (BRSR), which includes ESG-related disclosures, for the top 1,000 listed companies (by market cap) by FY23. However, this development should not be construed as ESG becoming a matter of compliance. While many Indian companies had already taken cognisance of ESG before the SEBI announcement, the adoption levels vary significantly across companies, with most of them adopting ESG at a strategic level. To move the ESG conversation from the boardroom to a level of operational transformation, it is critical to embrace circularity across operations while appreciating how the circular economy is becoming a business imperative and not just a reporting consideration.
https://cfo.economictimes.indiatimes.com/news/circular-economy-is-a-business-imperative-in-an-increasingly-esg-driven-world/86358182
