Comply or close: The new reality for corporations in India
Increased regulation, more stringent enforcement, a tougher judicial stance and intensifying community pressure are forcing businesses in India to confront their impacts on the environment, explain Pranav Sinha and Sanjukta Biswas
As we approach the end of 2019, India’s story of industrial growth and urbanisation is continuing to progress, albeit with a few hiccups along the way. India remained the fastest-growing major economy in the world in 2018-19 (6.8% growth), even as the world’s output growth declined from 3.8% in 2017 to 3.6% in 2018. The IMF’s April 2019 World Economic Outlook (WEO) report projects that India’s GDP will grow by 7.3% in 2019, even as it foresaw a decline in the growth of world output and of emerging market and developing economies by 0.3% and 0.1% points respectively. The Asian Development Bank Outlook 2019 expects India’s growth to touch 7.2% in 2019-20 and 7.3% in 2020-21, corroborating WEO estimates.
However, what price is India paying? The World Bank cautions that India’s remarkable growth record is clouded by a degrading environment and increasing scarcity of natural resources. Mirroring the size and diversity of its economy, the environmental risks facing India today are wide ranging and driven by both prosperity and poverty. India lags behind even sub-Saharan Africa and the Caribbean in environmental performance: per the 2018 Environmental Performance Index (based on 24 indicators spread across 10 issue categories), India’s overall rank was 177 out of 180 countries surveyed, and ranked bottom on Environmental Health in the same index. Figure 1 shows India’s scores on Environmental Health and Ecosystem Vitality relative to other countries.
Figure 1: India’s scores on the EPI 2018, relative to other countries and regions
According to a 2016 WHO survey across the G20 economies, 14 of the world’s 20 most polluted cities were in India. IQAir’s World Air Quality Report of 2018 paints an even grimmer picture, with 15 of the world’s 20 most polluted cities located in the country; Delhi and its suburbs are among the most polluted locations on earth. Similarly, two of the five most polluted rivers in the world are in India, even as 54% of India faces High to Extremely High water stress, per the World Resources Institute.
According to the World Bank, environmental degradation costs India about US$80bn a year – about 5.7% of India’s GDP. Poverty remains both a cause and consequence of resource degradation: agricultural yields are lower on degraded lands, and forests and grasslands are depleted as livelihood resources decline. To subsist, the poor are compelled to mine and overuse the limited resources available, creating a downward spiral of impoverishment and environmental degradation.
India must plug this drain on its resources and economic growth by implementing effective and stringent measures to prevent and regulate pollution in all its forms, whether from industrial sources, vehicles or agriculture. Only then will the country be able to realise its dream of becoming a US$5trn economy by 2024.
Various interventions implemented by the Indian executive, legislature and judiciary, as well as continued citizen activism, indicate that we are witnessing a paradigm shift in environmental governance and enforcement, even as India works to enable greater ease of doing business and cut through bureaucratic red tape. A recent and hard-hitting example of this was the National Green Tribunal’s (NGT) 10 July 2019 ruling ordering the Central Pollution Control Board (CPCB) and State Pollution Control Boards/Committees (SPCB/PCCs) to:
- Shut down, within three months, all polluting industries in 69 industrial estates across the country that were assessed as being ‘critically polluted’ or ‘severely polluted’
- Estimate the compensation to be recovered from the polluting industries in these 69 industrial estates for the past five years, taking into account not just the cost of damage caused to public health and environment, but also the cost of restoring damaged elements of the environment and a punitive amount to create a deterrent for future violations
- Collect interim compensation in advance from all industries, pending assessment of compensation liability. Amounts for this range from US$35,000 to US$150,000
- Stop setting up new industries and prohibit the expansion of existing polluting industries until environmental impacts in these industrial estates are brought to within permissible limits and the carrying capacity of the area has been assessed.
The ability to manage environmental risks and convert some of them into opportunities will be the key determinant of success as corporations expand their presence and reach in India. Failure to do so will expose corporations to the risk of business interruption (in India and across global supply chains), material financial penalties and loss of reputation.
A rapidly evolving regulatory regime
During the past few years, a surge of new and materially amended environmental regulations have come into force in India. Between 1972 and 2015, 30 environmental regulations were brought in; the same number of new or materially amended laws have come into force since April 2016 (see Figure 2). Most of these have material and far-reaching implications for the environment while also adding to the compliance burden for industries.
The rapidly changing regulatory landscape restricts corporations’ ability to predict their future compliance burden. For example, India’s decision to leapfrog from BS-IV to BS-VI (equivalent to Euro 6) norms for vehicular emission, and the Supreme Court’s ruling that all vehicles sold after 31 March 2020 must meet BS-VI standards, has upset many automakers’ profit arithmetic while promising a significant abatement in air pollution and the related disease burden. At least six other draft regulations are currently under consideration, including one that may result in a complete overhaul of foundational environmental legislations, as well as the regulatory framework.
Figure 2: Number of new or materially amended regulations in various five-year periods
Source: Review of new/amended environmental regulations conducted by ER
Enhanced and more stringent enforcement
We have also witnessed an upswing in enforcement actions taken by the CPCB, SPCBs and Central Groundwater Authority. Regulators at federal and state levels have been proactive in identifying, investigating and prosecuting errant industries, in alignment with new regulations and various judicial pronouncements.
CPCB has developed a new technology-enabled solution known as India E-Track Industries to store and retrieve up-to-date information on the 17 most polluting industry sectors. Figures 3 and 4 present CPCB data on the number of show cause notices (similar to notices of violation) and closure notices that it issued to these industry sectors in 2016 and 2017 .
Figure 3: Show cause notices issued to 17 most polluting industry sectors in 2016 and 2017
Source: CPCB website
Figure 4: Closure directions issued to 17 most polluting industry sectors in 2016 and 2017
Source: CPCB website
Data obtained by ERM from the Uttarakhand Environment Protection and Pollution Control Board (UEPPCB) also indicates an upward trend in the number of closure directions issued to errant industrial units in the state (Figure 5).
Figure 5: Number of closure directions issued by UEPPCB since 2010
Source: UEPPCB response to RTI request
A hardening judicial stance
The foundational principles of environmental jurisprudence were laid by Indian courts between 1986 and 1996. These principles include:
- Right to wholesome environment being an inherent part of the right to life and liberty guaranteed under Article 21 of the Constitution
- The polluter pays principle
- The precautionary principle
- The concept of special onus of proof that rests with the industrialist or developer, rather than with the petitioner
- Industrialists or businesses engaging in hazardous or inherently dangerous activities for personal profits to have absolute liability towards society
- Financial compensation must be co-related to the magnitude and capacity of the enterprise so that it has a deterrent effect
- The public interest litigation did away with the requirement of locus standi in matters of environmental harm.
The past five years have seen these principles being applied by the Supreme Court, High Courts and the NGT in a series of judgments to consistently penalise corporations and even governments that have caused environmental harm or allowed/facilitated such practices. Consider the following landmark judgments:
- In August 2013, the NGT levied a compensation of ₹100 crore (approximately US$14m) on Sterlite Industries’ Tuticorin plant, India’s largest copper smelter. What makes this significant is that this huge fine was for emitting SO2 in excess of prescribed limits – a relatively minor and common matter. In its order, the NGT referred to the Delhi High Court ruling in the Oleum Gas Leak Case and stated that the high penalty was set so that it may act as a deterrent, since the company had violated requirements multiple times in the past despite notices from the Tamil Nadu Pollution Control Board.
- In August 2018, the Supreme Court ordered Pune-based firm Goel Ganga Developments to pay ₹105 crore (approximately US$15m) for causing environmental damage at three of its projects in Pune.
- In March 2019, the NGT levied a compensation of ₹500 crore (approximately US$70m) on Volkswagen in India for use of ‘deceit devices’ that masked emissions of nitrogen oxides that were higher than prescribed BS-IV norms.
- In January 2019, extending the principle of res ipsa loquitur to governments as trustees of the environmental resources, the NGT asked the Government of Meghalaya to deposit an initial amount of ₹100 crore (approximately US$14m) towards interim compensation. It also directed that the final figure of compensation be ascertained based not only on the damage caused due to illegal coal mines, but also on the net present value of the ecological functions foregone and the paying capacity of the state government. Importantly, the order also gave the Government of Meghalaya the liberty to recover the amount from those involved in illegal mining and also from officers who may have colluded or failed in their duties. Similar penalties have also been levied by NGT on the Government of Andhra Pradesh for not controlling sand mining and the Government of Tamil Nadu for not controlling pollution or preserving Chennai’s waterways.
- As discussed earlier, the NGT in its 10 July 2019 order directed the CPCB and SPBs/PCCs to prohibit operation of all existing polluting industries in 69 industrial clusters that were assessed to be critically or severely polluted, while also directing the regulators to collect interim compensation from all polluting industries in proportion to the magnitude of their business.
An upswing in the number of cases being heard, as well as in the quanta of penalties being levied on errant corporations and governments, is clearly visible. Since 2018, the NGT has delivered around 50 orders under the polluter pays principle. Of these 50 orders, 15 (30%) have had a penalty amount between ₹5 crore and ₹75 crore (US$700,000 and US$10m). Between January 2019 and 7 April 2019, the NGT levied penalties of ₹873 crore (approximately US$123m), whereas it had ordered damages and penalties of ₹477 crore (approximately US$67m) in all of 2018. Figure 6 illustrates the recent increase in number of significant judgments from the Supreme Court, High Courts and NGT.
Figure 6: Number of significant judgments in various five-year periods
Source: ERM’s review of significant judgments of the Supreme Court, various High Courts and the NGT between 1980 and 2019.
E&S issues now pose material risks
During the past decade, environmental performance (distinct from compliance) has evolved from a technical issue and an externality to an increasingly common business risk. Land, forests, water and air – already emotive issues – gain greater salience as they coalesce with issues of social wellbeing and community rights. Together, these produce the three-edged risks of carrying capacity, resource scarcity and a fragile social licence to operate.
Regional carrying capacity
Regional carrying capacity has now started to limit industrial expansion and growth. The NGT has directed the CPCB to assess the carrying capacity of the 69 critically and severely polluted industrial estates, as well as 102 cities, including Delhi, where air quality does not meet the National Ambient Air Quality Standards, before it decides whether to allow new or expanded industries in these areas. It has also directed that the carrying capacity of Manali and McLeodganj be assessed; the NGT may ban construction in these cities as it did in Shimla if the carrying capacity has been exceeded.
While regional carrying capacity is now being taken into account by the government and the courts in determining whether to allow new or expanded industrial operations, existing operations are, in some places, facing scarce natural resources.
India’s power generation sector presents one example. World Resources Institute’s research shows that growing water scarcity forced 14 of the country's 20 largest thermal utilities to shut down at least once between 2013 and 2016, causing losses of US$1.4bn in revenue. Water shortages are the top environmental cause of power plant outages in India and the fifth-largest reason for forced outages overall. India forfeited 14 terawatt-hours (TWh) of electricity in 2016 due to water shortages – enough energy to power neighbouring Sri Lanka for a year. India's electricity generation grew by 204TWh between 2013 and 2016 – but the 30TWh of lost generation from water shortages during this period cut this growth by almost 15%. Had their design and operation been more water-efficient, Indian power plants could have avoided these losses.
Figure 7: TWh of thermal electricity generation lost due to water shortage
Source: Parched Power, WRI
Social license to operate
Social license to operate (SLO) is one of the biggest risks facing multinational corporations. For the second consecutive year, a recent report on mining and metals listed SLO as the number one risk for mining and metals corporations.
Of respondents who answered a survey, 44% listed SLO as the most significant risk for their businesses. Interestingly, SLO includes risks from factors such as new or revised government policies and pressures from end-users for sustainable and ethical sourcing of raw materials and labour.
Figure 8: Top 10 risks facing multinational mining and metals corporations
Source: Top 10 business risks and opportunities – 2020, EY
There are plenty of examples of this risk causing disruption to businesses. From Singur to Niyamgiri and Tuticorin, multinational corporations have had to abort well-laid plans for new projects or large expansions in the face of strident protests by residents agitating over land rights, forest rights, ways of life and pollution – despite holding valid government approvals. Nor is it just corporations that have suffered. Large government undertakings, such as the nuclear power plant at Kudankulam in Tamil Nadu and the Lower Subansiri Dam in Assam, have also faced public protests that they had not anticipated, resulting in long delays, reduced return on investments and attendant losses.
Even if an entity holds all required governmental approvals, it cannot hope to survive and thrive if it does not win over the local community. This cannot be achieved merely via corporate social responsibility initiatives – the corporation must be seen to operate in manner that does not impinge on the resources available to the neighbouring community.
What can corporations do?
Corporations must urgently embed sustainability in all that they do. An acknowledgement of E&S risks must be inherent in, and integral to, development and implementation of business strategy across all phases – from inception to growth and expansions all the way to divestiture. ERM recommends the following responses to the risks posed by the new realities of business:
Action 1: Mapping and mitigating E&S risks
It is crucial for businesses to map out all material E&S risks posed by their operations at all points in the project or product lifecycle. It is also important to identify all material E&S risks that the business faces from issues within and beyond the fence line. This must form the basis for identifying effective risk control measures.
Risk control measures may take the form of one or more of the following:
- E&S impact assessments for proposed projects or expansions
- E&S due diligence for assets
- E&S management systems that incorporate measures to address regional carrying capacity, resource scarcity and effective waste reduction and re-use
- Proactive management of community and social concerns
- Climate change risk assessments and adaptations (for example flood risk management plans and newer energy sources)
- Voluntary disclosure and remediation of impacts to environment.
Action 2: Building a culture of performance
Corporations must proactively move away from cultures of ‘casual compliance’ (which treats compliance with regulatory and other requirements as optional) and ‘paper-based compliance’ (which seeks to comply with the letter of the law in its narrowest sense and focuses excessively on documents while ignoring actual performance). Instead, they must inculcate a culture of performance. Clear and visible senior leadership commitment must flow from the top of the organisational hierarchy down to every single frontline worker, as well as throughout the supply chain.
Key determinants for the success for a performance-focused culture are:
- Embedding sustainability meaningfully in the corporation’s business strategy
- Choosing the correct metrics to define and track success.
Action 3: Developing and implementing an effective sustainability framework
Implementing an overarching sustainability framework that governs all operations across the asset lifecycles is an effective way to embed sustainability and realise tangible performance improvements. Well-implemented sustainability frameworks can significantly mitigate risks as diverse as climate change, resource scarcity, community and social risks, and risks from global supply chains.
Action 4: Implementing robust compliance programmes
To deal with the ever-changing regulatory and other requirements, and to derive competitive benefits from these where possible, it is imperative for corporations to develop robust mechanisms that:
- Identify emerging trends in regulations by conducting forward-looking reviews
- Track changes in regulatory and other requirements
- Run effective compliance assurance programmes
- Complete identified corrective actions in a time-bound manner, with each corrective action being tracked to completion and its effectiveness being validated before the matter is considered closed.
A new paradigm
It is clear that India is undergoing a significant shift. Even as the country strives to improve the ease of doing business and welcome foreign investments, the Indian populace, regulatory authorities and judiciary are past the point of accepting and condoning environmental harm for the sake of economic growth and livelihoods.
Now that E&S issues pose material risks to business success and longevity in India, industry leaders must step up efforts to truly and completely integrate E&S considerations into their long-term growth strategies, based on a holistic and balanced view of the operating scenario. Not only would this keep corporations protected from E&S risks, it would also yield longer-term results.
E&S performance also directly correlates with improved financial outcomes for businesses and the nation. Corporations worldwide are on a three-stage journey from environmental compliance, through environmental risk management, to long-term sustainable development strategies. Implementation of sustainable business strategies can lead to new opportunities and improved results. Corporations that can make this transition quickly will stand to gain the most, while those that lag will inevitably struggle to survive and thrive in this new operating reality.
Pranav Sinha is global technical community leader – audits at ERM.
Sanjukta Biswas is a sustainability consultant at ERM.
Image credit | iStock