Corporate environmental investments and creation of value - a survey of Indian companies

Abstract

Environmental concern has brought a number of measures in the past 30 years, culminating with the Kyoto protocol in 1997. From the first measures such as the Clean Air Act and Clean Water Act in the US to the trading of carbon emission rights, public policies have moved from regulation to incitation. Companies are trying to follow that move, from compliance to initiatives, but there is a huge gap between environmentally proactive and passive companies. Still, in many industries, the role that environment plays in corporate decision-making is crucial. In modern manufacturing groups, operations are now designed from A to Z to meet internal environmental standards1; an industry of environmental equipments, designed to reduce environmental impact of customers is growing fast; lastly, products are featuring environmentally friendly characteristics are becoming popular, too. This evolution shows that environment has reached a status where it is not only a constraint for companies, but a means of conducting their strategy. This study is aimed at assessing the efficiency of Indian corporate environmental policies. The question of the value created by environmental investments needs to be studied from two different angles. First, the nature of the value that is being created has to be determined. This is why we are conducting a survey of corporate environmental investments in India, trying to determine the nature of the value created. The conclusion is an attempt to analyse under what conditions is value best created by such investments. But before entering into the survey, let us clarify the terms of the question raised. Corporate environmental investments Corporate refers to companies, as driven by profit and shareholder’s values. This excludes government agencies, which can lead environmental programmes without caring about their economical efficiency, since they implement public policies. But public sector companies are included, since they are driven by their own economical purposes. Although the board is often appointed by the State2, and may have to achieve governmental objectives, they have to achieve rentability as well. Why do we care about rentability and economical efficiency? Can’t public policies improve quality of environment simply by spending or giving stringent standards? This study considers implicitly that public spending is not a solution to degradation of environment. First, because public budgets are very tight. Second, and most important, because we think a model where corporations are structurally consuming a common resource such as environment, with the State paying for it, isnot sustainable, because unbalanced. The cheaper a resource is, the more rapidly it will be consumed. It is true that environmental standards increase the price of environment as a resource. It is also true that the State is paying for remediation through its environmental spending. But the community also has to bear irremediable hazards, and this cannot be priced (for instance, a dead specie has no price because it cannot be replaced but has great value). Hence corporate environmental investments can bring both benefits to the investing company and to the community. The old assumption that companies are consuming environmental common good is no longer true since they can create common environmental value as well3. 1 A good example of a subsidiary implementing successfully internal standards is Toyota KirloskarMotor, as explained hereafter. 2 Public power in any political unit is here referred to as the State. 3 Are you being served?, The Economist, April 23rd 2005 2 Environmental: project that has a positive effect on environment, this effect being one of the objectives of the project, if not the main objective. Investment: individualised project of a company, or its main business, which can also be considered as an investment, from the investor’s standpoint. Creation of value: a financial definition is what can be valued by financial markets, or, for short, what is valuable for the shareholders. Rather than adopting such an approach, which would require financial data and analysis, we prefer adopting a definition of value creation as a step towards the company’s objectives. In other words, creation of value is a contribution to the corporate policy.