Are PSUs joining the race for net zero?

Sankar Chakraborti | Updated on: Apr 25, 2022
Public sector units with low ESG scores will struggle to win the faith of investors 

Public sector units with low ESG scores will struggle to win the faith of investors  | Photo Credit: KACPER PEMPEL

With focus being on divestment, PSUs need to accelerate their sustainability efforts to attract investors. Yet moving to cleaner energy models is a long, complex process

Divestment in public sector undertakings (PSUs) is a conscious decision by the government to generate revenues, maximise value creation, and make these enterprises more efficient. It’s a step towards reform, but investors aren’t moved. These potential stakeholders in PSUs are serious about Environmental, Social, and Governance (ESG) issues and every opportunity is dissected threadbare in board meetings from ESG angles.

With investors increasingly scrutinising the so-called polluting industries like cement, oil and gas, steel and shipping through the ESG lens, PSUs have to show eagerness to transit to clean operations and offerings.

The privatisation processes for PSU giants have been going on for some time. One challenge highlighted consistently is their compliance with the ‘E’ in ESG principles. Although these firms have been trying to work on sustainability strategies, they’re not enough to win the trust of future investors.

With greenwashing being a common phenomenon, most of the potential buyers are wary of claims companies make about their own achievements. Effective demonstration of initiatives taken towards ESG is the missing link. This is done through audit, independent validation and benchmarking of the voluntary disclosures.

First, let’s applaud these companies for accelerating their sustainability efforts to become a force for the better. In limiting the consumption of traditional fossil fuels in operations, moving to renewable alternatives like solar energy, slashing carbon emissions, and joining the race to net zero, they’re showing genuine ESG intent.

Coal India Ltd, for instance, is shutting down small mines to focus on solar panels. The company is also refraining from starting mines that would require mass hiring. BPCL is scaling up its renewable energy portfolio. Indian Oil is setting up India’s first green hydrogen plant.

Complex process

Yet moving to cleaner energy models is a long, complex process. Many business entities are grappling with the challenges of old infrastructure which, by its very nature, is polluting and inefficient.

Moreover, it would be unrealistic to expect traditional power systems that have served the masses for decades together to integrate into new energy models overnight. Government is showing intent to roll out 24x7 electricity schemes for rural areas where around two-thirds of India’s population lives. This means electricity demand in the country is going to grow and will be reaching new peaks, a reality that cannot be ignored while assessing PSU’s ESG endeavours.

Also, while PSUs are pivoting their portfolios to achieve long-term sustainability goals, they need access to a significant amount of capital to make the clean-energy transition and time to win stakeholders’ confidence.

Private sectors, in comparison, are early adopters of sustainability and usually display robust ESG frameworks. There’s a perception that PSUs will struggle to pick up pace in their ESG endeavours.

However, based on a study conducted by ESGRisk.ai across 539 private sectors and 64 PSUs, it emerged that the public sector units performed marginally better than their private counterparts in managing biodiversity impact and employee development.

Private sector companies scored an average 32 per cent in the key issue of employee safety as opposed to public sector companies (27 per cent). Even in community support and development, the gap is not glaring. That said, the study revealed that private firms are a clear winner in energy efficiency, GHG emissions and water efficiency.

This data asymmetry could be attributed to lower levels of voluntary disclosures. With Business Responsibility and Sustainability Reporting (BRSR) changing the game in ESG disclosures, the gap is expected to reduce.

Concerted effort needed

In sum, PSUs are poised to lead the ESG landscape in India. What’s required is a concerted effort to improve voluntary disclosures, highlight sustainability initiatives, publicise targets, and build a mechanism for independent audits and ESG assessments.

PSUs with low ESG scores will struggle to win the faith of investors, who might consider themselves vulnerable to sudden shocks and high risks in the long-term. It’s undeniable that ESG compliances and disclosures translate into high ESG scores and subsequently result in superior returns. Investors sense an opportunity for ESG uptake and potential to unlock revenue opportunities.

Organisations that are more ESG-complaint generally deliver higher returns. Last year, it was reported that the Nifty 100 ESG index outperformed the Nifty 50 by posting returns of 51 per cent.

The Nasdaq index, which supports transition towards sustainable capital markets, too is increasingly attracting investors. Even the Nordic markets are committed to ESG opportunities across Europe.

Low ESG scores keep investors at a distance. Engaging with third-party, independent ESG rating agencies thus become the key to identify gaps in sustainability strategies that hinder ESG scores which, in turn, can push back divestment processes by several years. When big chapters in divestment history are written, wouldn’t ESG rating institutions flash that proud grin?

But the decision to acquire stakes in PSUs isn’t made by circulating datasheets. Investors are keen to see whether companies are making absolute ESG responses. They aren’t wary of raising uncomfortable questions. Do PSUs have the right processes in place? Are organisations doing more than just responding to the regulatory body’s guidelines? More significantly, did they have their firms ESG-rated to be compliant with international practices?

The writer is Group CEO Acuite, and Chairman, ESGRisk.ai

Published on April 25, 2022
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