Are corporates quietly leading India's climate transition? A researcher's perspective
The disparity in perception itself reveals a key challenge -- the market has yet to fully internalise climate risk. But how, one might ask, are climate and finance interlinked in the first place? What does 'climate risk' actually mean in financial terms?Is it merely the spectre of floods, droughts, and natural disasters? Or is there more to the story? The answer lies in the policy shifts playing out on the national stage.India is a committed signatory to the United Nations' Sustainable Development Goals (SDGs) and has made ambitious Nationally Determined Contributions (NDCs), including a pledge to source 50% of its electricity from non-fossil fuel sources by 2030.Admirable, certainly. But for corporates, these noble climate pledges translate into hard compliance mandates, tighter disclosures, and operational restructuring, in essence, a new breed of operational risk.Consider the Business Responsibility and Sustainability Reporting (BRSR) framework mandated by SEBI for the top 1000 listed companies in India.Firms must now disclose granular details about their energy consumption, carbon emissions, and sustainability practices. Climate compliance is no longer a corporate social responsibility initiative; it is gradually becoming a strategic necessity.The pressure doesn't emanate solely from regulators. A more environmentally conscious breed of investors, consumers, and civil society actors are demanding accountability.The surge in sustainable and responsible investing (SRI) is proof that environmental stewardship now carries market consequences. The upshot of all this?Companies are increasingly exposed to 'transition risk', i.e., the financial and operational fallout from a rapid move toward greener norms, policies, and technologies.This runs parallel to 'physical risk', the traditional category encompassing the direct impact of climate-related disasters like cyclones, droughts, and extreme heat.Together, these twin risks are reshaping the contours of corporate decision-making in India. To empirically assess this behavioral shift, we conducted a comprehensive study of 1174 listed non-financial firms in India spanning 2005 to 2021.advertisementOur aim was simple yet urgent: Are Indian companies adapting to climate risk? If so, how? Our findings, recently published in Energy Economics, offer compelling insights.Corporate energy consumption, which accounts for nearly 41% of total national energy usage (MoSPI 2021), is already being recalibrated in response to climate risk.We observed that firms facing higher climate vulnerability are significantly reducing their energy consumption. This isn't coincidental but a clear response to regulatory, reputational, and financial pressures.Interestingly, this response is asymmetric. Energyintensive firms are leading the charge, likely because they have more to lose from inaction.Further, non-affiliated firms (those not part of large business groups) and those with robust corporate governance mechanisms show stronger climate responsiveness.Governance quality plays a crucial role in steering firms toward long-term sustainability strategies, while business group affiliation may cushion the perceived impact of climate threats, thereby dulling the urgency to act.This shift became more pronounced after the 2016 Paris Agreement, marking a tipping point in how Indian firms interpret and respond to climate policy signals.Of course, reducing energy consumption is not without trade-offs. Firms face a strategic dilemma: inaction invites regulatory penalties and investor backlash, while aggressive energy cuts can impair productivity, output, and competitiveness.advertisementENERGY EFFICIENCY EMEREGES AS A STRATEGIC BUSINESS RESPONSEOur research reveals that firms are not merely cutting back; they are pursuing a strategic middle path, i.e., improving energy efficiency.By investing in technology upgrades and process optimisation, they are learning to generate more output with the same or lower energy input.This not only mitigates emissions but also improves cost efficiency and long-term resilience. Notably, markets appear to be taking notice.Companies that demonstrate better energy efficiency attract higher valuations, suggesting that capital markets are beginning to reward green behaviour, an encouraging signal for the future of ESG investing in India.India finds itself at a crossroads. As per the ND-GAIN index, it ranks 115th out of 187 countries in climate vulnerability. At the same time, it is poised to become the thirdlargest global economy.Yet, over 76% of its energy needs in 2021 were met by coal and crude oil. This dichotomy, between environmental fragility and developmental urgency makes the role of Indian businesses absolutely pivotal.The state alone cannot carry the climate burden. The baton must also be passed to industry, not just to react, but to lead. Our research shows that this leadership is already emerging quietly and unevenly, but undeniably. While global climate diplomacy continues to be marred by political deadlock and insufficient commitments, as evidenced by India's rejection of the $300 million annual climate grant at COP29, terming it 'too little, too late', the real action may be unfolding elsewhere.advertisementTo catalyse this movement, government and regulatory support must keep pace.Transparent disclosures, streamlined access to green finance, and predictable policy frameworks are critical to support companies that are willing to walk the talk.(THIS ARTICLE HAS BEEN CO-AUTHORED BY SHASHANK PRAKASH SRIVASTAV, DOCTORAL SCHOLAR, AND PROFESSOR M. KANNADHASAN, BOTH FROM THE INDIAN INSTITUTE OF MANAGEMENT RAIPUR)- Ends
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