The following were some of the questions submitted during the upGrad session. I thought it would be helpful to gather them, and answer them.
In
your experience, how does ESG market leadership contribute to achieving market
dominance?
We have to consider that with the tightening of legislation pertaining to climate change, we will see a greater emphasis on the compliance carbon credits. There are not enough compliance credits. The foundation of market leadership is for companies to take stakes in viable carbon sink projects so that they have access to carbon credits. If they have the carbon credits, and competitors do not, they can sell the excess at a premium. This is a direct source of revenue at the expense of competitors.
Can
you provide examples of companies that have successfully leveraged ESG
practices to gain a competitive edge?
Tesla is a good example. In 2022, Tesla’s revenue from automotive sales was US$67.2 billion, while its revenue from the sale of regulatory credits to other automakers was US$1.8 billion. How much does it cost to create those carbon credits, versus the cost of producing one car? The carbon credits are created incidentally, meaning we can argue that almost all of that US$1.8 billion revenue is profit. The same cannot be said for the US$67.2 billion from automotive sales. Tesla has secured an ESG leadership position and made billions over the years by taking advantage of the system.
Tesla positions itself as a leader in the electric vehicle market and the carbon credit market. Tesla claims its solar panel installation business and its EV business generate carbon offset credits by reducing greenhouse gas emissions. These credits are sold to other firms, primarily automakers, which struggle to meet emissions standards set by regulatory bodies like the California Air Resources Board (CARB). Strategically, what does this mean? It means Tesla is actively taking money from its competitors to fund itself, depriving these competitors the funds to develop products, services and marketing campaigns to compete. That is the sort of market leadership we are looking at. It is a brilliant strategic position where they have strengthened themselves at the expense of competitors.
How
does ESG market leadership impact market access for businesses?
As we near 2030, countries will continue to enact legislation to help them meet their climate pledges. This directly translates into an increase in carbon taxes, and incentives for abatement and reduction of carbon footprints. Companies that fail to take advantage of this will be at an inherent disadvantage because this translates into a material impact on revenue and market access.
We must also consider the optics of a company that is viewed as primarily culpable for an increased carbon footprint. Eventually, we will see more adverse weather conditions. Rising sea levels will mean movement of people, loss of access to amnesties, and loss of homes. As these events put pressure on society, it is only logical that the public need someone to blame. Governments are in the business of winning elections. Who wants to be the first executive leadership sacrificed, while revenue tanks?
Are
there specific market segments or industries where ESG practices have a more
significant influence on market entry or expansion?
There are four main industries that will be immediately most impacted by rising carbon taxes: maritime transportation, airlines, mining and the oil and gas industries. They are statistically the largest polluters, with the biggest carbon footprints. As we pivot towards a compliance regime for the cap-and-trade, these industries are expected to bear the brunt of newer carbon taxes, across multiple jurisdictions.
From
a personal perspective, how can individuals incorporate ESG market leadership
principles into their own professional journey?
The executive leader is a strategic leader first, and an operational leader second. We hire management for the latter. We need visionaries for the former. Part of the strategic landscape is to understand where legislation and other revenue pressures are moving, and pre-empt them by advancing initiatives that address the underlying contentions. For major corporations, it is the carbon footprint, because international pressure will ramp up. Companies need to look into methods to abate the carbon footprint, or invest in carbon sinks.
An executive leader is thus exercising the visionary leadership needed to navigate this impending challenge. The same principles we apply to do this are the same principles we apply in other aspects of our lives: reading the situation, identifying challenges, and addressing the underlying contentions.
What
are some practical steps one can take to align personal values with corporate
ESG initiatives?
Revenue and growth aside, it is in our interest to protect the environment and create a sustainable growth model. No company grew by killing its market. In this case, rising global temperatures is an existential threat to our civilisation. We need to remember that, instead of focusing on immediate shareholder value, because the wider society is a greater stakeholder here.
How
do companies integrate ESG market leadership into their overall corporate
strategy?
Any corporate strategy is about one thing: winning. And the market is essentially a zero-sum game. To win, someone else must lose. There are three basic kinds of market leaders: lowest overall cost, greatest innovation, and greatest customer intimacy. Regardless of the type of market leadership, we need sustained market growth. That means the continued existence of some semblance of society is necessary. Climate change is a threat to that. As long as we can remember that at an executive level, any and all corporate strategy will seek to address that.
Are
there any challenges or roadblocks they commonly encounter during the
implementation process?
The greatest roadblock to implementing any form of ESG policy is this unfortunate myopia that bedevils many leaders. They see their immediate success, and forget the process that brought it was years in the making. What got us here is not what will bring us to the next peak. Too many companies prioritise short-term growth over long-term success. Any other form of challenge, whether it be legislation, tax exposure, political exposure and environmental challenges are second to this because this myopia is inclement to formulating a proper response to these challenges. This is akin to people painting the deck of the boat instead of fixing the leak while a storm threatens from across the horizon.
Can
you share any insights on how ESG market leadership affects investor perception
and decision-making?
In the US, the concept of ESG has been politicised. Fortunately, I believe the rest of the world is saner, and understand that climate change is not something to be taken lightly. There is a growing movement of activist investors all over the world, putting pressure on many companies, from oil majors to mining concerns. No company wants that sort of scrutiny because it does eventually affect market exposure and share price.
How
do investors evaluate companies’ ESG practices and incorporate them into their
investment strategies?
Generally, there is a requirement for companies to report their carbon footprint as part of the assessment of their carbon tax exposure. This can be found in their audited reports, in the amount of carbon credits they purchase, the provision set aside to purchase carbon credits, and their declared projects. All this is made available to investors, and evaluated.
In
terms of sustainability reporting and disclosure, what are some best practices
that companies should follow to effectively communicate their ESG market
leadership to stakeholders and the wider market?
Firstly, this should be part of the mission statement. Secondly, this should be made an intrinsic part of the branding. These statements should be found in the annual report and other forms of documentation, as part of the company disclosure. Finally, it is important that the company is seen to be an active participant in ESG initiatives that involve the community. It is not enough to be heard; we must be seen to embrace ESG.
Are
there any emerging trends or developments in the field of ESG market leadership
that attendees should be aware of?
The primary emerging trend is the pivot towards the compliance market, at the expense of the voluntary market. Voluntary credits, and companies such as Verra, have had to deal with controversies that affect the credibility of voluntary credits.
The second emerging trend is the increased carbon tax that will be implemented all over the world. As regulations tighten, and the regulatory framework coalesces into a binding international framework, the price of carbon credits will rise exponentially.
There is also the issue of carbon capture. The cost of the technology will eventually drop as adoption spreads, but the cost of keeping all that carbon captured will not likely drop significantly. This means, in the long term, carbon sequestration is more economically viable. Carbon capture is the use of mechanical or chemical processes to trap carbon dioxide and other greenhouse gases. Carbon sequestration is the utilisation of natural processes.
How
do these trends impact businesses and their competitiveness?
These trends directly impact businesses because the cost of abatement, or paying the carbon tax will directly raise the cost of doing business, and impact revenue in the short term. In the long term, should these measures fail, we will be dealing with the loss of productivity due to climate change itself, which has an actual human cost. Either scenario is an environment of rising costs and uncertain revenue.
What
are some potential risks or pitfalls companies should be mindful of when
pursuing ESG market leadership?
The greatest pitfall is the fact that many businesses are simply throwing money into any project that has the “ESG” label, without understanding what these projects actual do to help them, and assess their efficacy. In the short term, it is a cost and a loss. In the longer term, it affects the credibility of ESG projects as a whole, and creates resistance in the organisation, among stakeholders, against taking real action.
How
can they mitigate these risks and ensure long-term sustainability?
Firstly, there must be an actual ESG strategy that involves consultation with experts, who understand the carbon tax framework, the direction of regulation and legislation; and whether abatement or the cap-and-trade is the preferred option. There are a lot of conversations to be had before that ESG policy becomes part of corporate culture.
Secondly, for most businesses, the cheaper option is carbon sequestration through carbon sinks, and the focus on the compliance market. Taking the wrong direction, and throwing millions in the wrong direction is not only a waste of funds and resources, but also sets the company back when we are racing to meet national climate pledges for 2030 and 2050. Those that lag behind will bear the brunt of the carbon tax.
How
can organisations foster a culture of ESG market leadership among employees and
stakeholders?
The first is education. There is a lot of talk, but little understanding on what ESG actually is, and what is at stake. Without this understanding, we cannot expect corporate leadership take the lead in driving an ESG policy.
The second is the translation of that statement of intent into an actual strategy in order to secure carbon credits, and secure a lead in tackling climate change, while lowering the carbon footprint. Being a first mover has monetary risk. Being a late mover has all the risks of a first mover, in addition to regulatory risk and political exposure. From a branding perspective, no one wants to be seen as the villain, especially in an age of activist investors and consumers.
Are
there any specific initiatives or programmes that can help drive this cultural
shift?
Because I believe in this, I actually founded a company solely for the purposes of creating carbon sinks to sequester carbon. In the process, we create investment-grade blue carbon credits, to be traded on a compliance exchange. The intent is to drive the creation of a secondary market, with carbon credits as financial instruments. Normalising carbon credits as another type of commodity and class of financial instruments will create the value needed to pivot the market, and fund further ESG initiatives. That company is Red Sycamore.
From
a global perspective, how does ESG market leadership vary across different
regions and markets?
It does not only
vary across regions, but also according to industry. Different industries have different types of
credits, most for the voluntary market.
Even compliance credits cannot be traded across exchanges, because we do
not yet have a truly global clearing house.
The national emphasis on ESG partially explains the vast discrepancy in
prices and quality of these credits.