BACKGROUND
Our Hon’ble Prime Minister Shri Narendra Modi has well said “Yahi Samay Hai. Sahi Samay Hai..” |
So let’s bring in a touch of formality.
Consider the storyline of climate change as a historical saga unfolding over time. The Earth, our venerable home, has witnessed notable shifts in its climate, a narrative that was once dominated by natural occurrences such as fluctuations in solar activity in the solar system and monumental volcanic eruptions involving zero human intervention. However, since the 1800s, the plot has taken an intriguing turn, with human activities emerging as the central protagonist in this climactic, long, and adventurous journey.
The crux of the matter lies in our extensive reliance on fossil fuels – the trifecta of coal, oil, and gas. In our relentless pursuit of energy, we have inadvertently altered the script of our planet’s climate. The combustion of fossil fuels releases greenhouse gases, effectively creating a thermal envelope around Earth. This metaphorical wrap functions like a snug blanket, ensnaring the sun’s heat and incrementally elevating global temperatures.
Concerning a reality check, the Earth’s surface temperature has risen by approximately 1.1°C since the late 1800s, surpassing levels seen in the last 100,000 years. The previous decade, spanning 2011 to 2020, has made a record of being the warmest in history. Astonishingly, each of the last four decades has surpassed its predecessor decades since 1850.
While some may associate climate change merely with rising temperatures, the reality is far more complicated. Our planet operates as an interconnected system, where changes in one dimension can trigger cascading effects across the entirety.
The repercussions of climate change are now manifesting as severe droughts, water scarcity, rampant forest fires, escalating sea levels, flooding, polar ice melt, catastrophic storms, and a distressing decline in biodiversity. In a series of United Nations reports, a consensus emerged among thousands of scientists and government reviewers: curtailing global temperature rise to no more than 1.5°C is crucial to avoiding the gravest climate impacts and sustaining a habitable climate. Unfortunately, prevailing policies point toward a grim scenario of a 3°C temperature rise by century-end.
The origins of emissions contributing to climate change span the globe, affecting all corners of the world. However, certain nations bear greater responsibility, with the seven leading emitters – China, the USA, India, the European Union, Indonesia, Russia, and Brazil – collectively accounting for roughly half of global greenhouse gas emissions in 2020.
SUSTAINABILITY
In an era where environmental concerns like climate change and resource depletion are more pressing than ever, the concept of environmental sustainability has emerged as a crucial element in global discourse. This narrative isn’t just about preserving our planet but also about ensuring a livable world for future generations.
Environmental sustainability is not just an ideal but a necessary practice of interacting responsibly with our planet to maintain its natural resources. This philosophy extends across various domains, from how we manage natural resources to the way businesses operate and consumers make choices, ensuring that our consumption of the Earth’s resources doesn’t exceed its capacity for regeneration.
The decisions we make now are the deciding element in determining the kind of planet we pass on to future generations.
SUSTAINABILITY–CORPORATE SOCIAL RESPONSIBILITY TO CORPORATE STRATEGY
In the domain of business, sustainability has evolved from a fringe concept to a core operational strategy. This shift isn’t just about corporate responsibility; it’s a response to a growing consumer demand for environmentally conscious practices. By integrating sustainability into their business models, companies are not only reducing costs through efficient resource use but are also opening new market opportunities and enhancing their reputations.
Some of the most significant ways businesses contribute to environmental sustainability is through various initiatives stated below:
➢ Promoting Renewable Energy By harnessing the power of clean energy, green jobs in the renewable energy sector not only cut down on greenhouse gas emissions but also ensure a consistent energy supply that’s less susceptible to market fluctuations. This, in turn, helps build up countries’ energy, security and independence.
➢ Waste Reduction and Recycling are crucial in reducing the amount of waste that ends up in landfills. By promoting recycling and sustainable waste management practices, we can reduce our carbon footprint and conserve valuable resources.
➢ Conservation of Natural Resources includes sustainable practices like crop rotation and organic farming to protect soil health and reduce water pollution.
EVOLUTION OF CARBON TALKS & GHG EMISSIONS
Recognizing the urgent threat posed by climate change, nations worldwide acknowledged the imperative of collaborative action. In response, they united under the banner of the United Nations Framework Convention on Climate Change (UNFCCC*), a pivotal international treaty aimed at mitigating the adverse impacts of climate change. This International treaty laid the groundwork for the establishment of the Conference of Parties (COP), a platform where nations convene to collectively deliberate on and enact strategies to combat climate change.
In addition to these pivotal steps, countries have undertaken various measures to manage climate change effectively, which we will delve into in the forthcoming paragraphs:
Source- atingi website
A. KYOTO PROTOCOL
How did it come into existence?
During COP-1 (i.e. Conference of Parties-First Meeting) convened in Berlin in 1995, participants of the 1992 UNFCCC* (United Nations Framework Convention on Climate Change) acknowledged that, in light of emerging scientific evidence, particularly underscored by the Second Assessment Report from the IPCC* (Intergovernmental Panel on Climate Change), the commitments outlined in the Convention were deemed “not adequate” for attaining its overarching goal. The culmination of this conference yielded a robust political mandate known as the “Berlin Mandate”. This directive paved the way for the formulation and acceptance of the Kyoto Protocol to the UNFCCC* during COP-3 in Kyoto, held in December 1997.
The Kyoto Protocol introduced innovative strategies to tackle emissions, notably through flexible market mechanisms centered around trading emissions permits. Here’s a breakdown: while countries are primarily responsible for meeting their pollution reduction goals through national efforts, they also have access to additional tools known as market-based mechanisms:
• Joint Implementation
• The Clean Development Mechanism
• Emissions Trading
We will discuss emission trading in brief in the forthcoming paragraphs.
B. PARIS AGREEMENT
The Paris Agreement was adopted on 12th December 2015, at the 21st session of the Conference of the Parties (COP 21) of the UNFCCC* in Paris. It entered into force on 4th November 2016.
The Paris Agreement acknowledges the imperative for a robust response “based on the best available scientific knowledge.” Furthermore, it underscores the importance of recognizing the distinctive needs and unique circumstances of developing country Parties, with a particular focus on the most vulnerable among them. Additionally, it emphasizes addressing the “specific needs and special situations” related to funding and technology transfer for the least developed countries.
This Agreement also led to the establishment of Nationally Determined Contributions.
As per the explanation provided by the UNDP* (United Nations Development Program), Nationally Determined Contributions, or NDCs’, are countries’ self-defined national climate pledges under the Paris Agreement, detailing what they will do to help meet the global goal of pursuing 1.5°C, adapt to climate impacts and ensure sufficient finance to support these efforts. NDCs represent short- to medium-term plans and are required to be updated every five years with increasingly higher ambition, based on each country’s capabilities and capacities.
India submitted its Intended NDC to the UNFCCC* on 2nd October 2015.
INDIA’S NATIONALLY DETERMINED CONTRIBUTIONS
Climate change happens because of both things people do and natural events. But most of the time, the things people do, like burning fossil fuels or cutting down forests, release gases that trap heat in the atmosphere, making climate change worse.
WHAT IS GHG?
GREENHOUSE GASES (GHG) are pivotal atmospheric components that play a fundamental role in the creation of the greenhouse effect. This effect is primarily orchestrated through the absorption of infrared radiation, where certain gases in the Earth’s atmosphere act as thermal insulators, trapping and redistributing heat. This natural greenhouse effect is essential for maintaining Earth’s temperature within a habitable range. As human activities alter land use patterns and intensify the combustion of fossil fuels, the concentration of GHGs in the atmosphere has increased significantly. This disturbance amplifies the greenhouse effect, resulting in the greater retention of infrared radiation. This imbalance contributes markedly to the phenomenon of global warming and, by extension, the broader spectrum of climate change.
TYPES OF GHGS
The Kyoto Protocol, introduced in 1997, categorizes GHGs into seven types:
1. Carbon Dioxide (CO2)
2. Methane (CH4)
3. Nitrous Oxide (N2O)
4. Chlorofluorocarbon-12 (CCl2F2)
5. Hydroflorocarbon-23 (CHF3)
6. Nitrogen Trifluoride (NF3)
7. Sulphur Hexafluoride (SF6)
Each of the greenhouse gases mentioned above has the potential to contribute to global warming, but it’s crucial to understand that they don’t play an equal role in this process. In fact, each greenhouse gas has a distinct impact on global warming and climate change.
GHG EMISSION – RESPONSE MECHANISM
When challenges emerge, the imperative to devise solutions becomes paramount. In response, the Paris Agreement emerged, encompassing the following strategies to address the pressing issue of increase in GHGs:
1. Mitigation– To design human activities in a manner to curtail the release of greenhouse gases (GHGs) into the atmosphere or to amplify the mechanisms that trap and remove these gases, contributing to the mitigation of climate change.
For Example: Shifting to Renewable sources, Afforestation, switching to Electric vehicles etc.
2. Adaptation– Any modifications made to natural or human systems in response to the real or anticipated consequences of climate change, aimed at mitigating harm and capitalizing on advantageous opportunities.
For Example– increasing Water use efficiency, adopting green building standards, supply chain diversification etc.
Every nation adopts distinct approaches to combat climate change, yet one increasingly prevalent measure, both internationally and in India, is carbon trading.
CARBON TRADING
As per Article 17 of the Kyoto Protocol (1997), Countries with commitments under the Kyoto Protocol can acquire emission units from other countries with commitments under the Protocol and use them to meet a part of their Kyoto targets.
• 1 tradeable CC = 1 metric ton of Carbon dioxide or equivalent quantity of another greenhouse gas that has been reduced, sequestered, or avoided.
The process involves entities generating credits through sustainable practices. When a credit is employed to offset, reduce, sequester, or avoid emissions, it transforms into an offset and is consequently no longer available for trading. This mechanism serves as a practical and market-driven approach to encourage and reward efforts to combat climate change.
Carbon markets operate as trading systems where carbon credits are exchanged. In these markets, companies or individuals have the opportunity to offset their greenhouse gas emissions by acquiring Carbon Credits (CC) from entities actively involved in reducing, sequestering, or avoiding greenhouse gas emissions.
Carbon trading is a system where companies earn credits for reducing their carbon emissions. These credits can then be sold to other companies that need them to meet their emission reduction targets. It’s like a marketplace where pollution reduction becomes a valuable commodity that can be bought and sold, encouraging businesses to find innovative ways to reduce their environmental impact
There exist two overarching categories within carbon markets:
1. Compliance– Compliance markets emerge in response to national, regional, and/or international policies or regulatory mandates.
2. Voluntary– Voluntary carbon markets, whether at the national or international level, involve the issuance, purchase, and sale of carbon credits voluntarily. In these markets, entities choose to engage in carbon transactions voluntarily, contributing to a more sustainable and environmentally conscious global landscape
Voluntary Carbon Market Trading can be done in the Primary Market as well as Secondary Market. Primary Market Trading refers to dealing directly with the end user, while secondary market involves an Intermediary.
Source- Atingi Website
INDIA’ S ACTION PLAN
1. The Indian Government, through the Ministry of Agriculture & Farmers Welfare, launched the Voluntary Carbon Market (VCM) Framework for the Agriculture Sector and Agroforestry Nurseries Accreditation Protocol in Delhi on January 29, 2024, with an aim to encourage small and medium farmers to join carbon markets, providing economic benefits and promoting eco-friendly agricultural practices.
2. Additionally, India introduced the Carbon Credit Trading Scheme (CCTS) through the Energy Conservation (Amendment) Bill of 2022 to establish a framework for carbon trading.
3. The Central Government issued the Green Credit Rules, 2023, on October 12, 2023, marking a significant move towards environmental conservation and sustainability through market-based mechanisms.
4. Perform, Achieve and Trade (PAT) is a regulatory framework designed to reduce Specific Energy Consumption (SEC) in energy-intensive industries. It involves a market-based approach where industries can trade certified surplus energy savings. PAT sets energy consumption norms for designated industries, requiring them to comply with regulations outlined under the Energy Conservation (EC) Act of 2001.
INTERNATIONAL SCENARIO- EUROPEN UNION ACTION
Recently, there has been growing attention on the Carbon Border Tax, spearheaded by the European Union as a pivotal measure to combat climate change.
CARBON BORDER TAX – BALANCING MECHANISM BETWEEN DEVELOPED & DEVELOPING COUNTRIES
“Carbon Border Tax heralds a new era of environmental accountability in international trade, where carbon emissions are no longer externalized costs but integral considerations.’’
A carbon border tax is like a fee that a country charges on products or it imports. This fee depends on how much pollution was made to produce those imported goods. The goal is to tackle unfair competition from countries with lax environmental rules and push companies worldwide to go greener. Even though it targets few sectors only, it is something which needs to be addressed.
Now, let’s dive into the details of the Carbon Border Adjustment Mechanism (CBAM) introduced by the European Union (EU):
CARBON TRADING FRAMEWORK – EU’S CARBON BORDER ADJUSTMENT MECHANISM (CBAM):
As per the Guidance Document issued by the European Commission on 13th December 2023,
The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy instrument designed to apply the same carbon costs to imported products as would be incurred by installations operating in the European Union (EU). In doing so, the CBAM reduces the risk of the EU’s climate objectives being undermined by production relocating to countries with less ambitious decarbonization policies (so-called ‘carbon leakage’).
The Carbon Border Adjustment Mechanism (CBAM) or commonly known as “Carbon Border Tax” is a key tool introduced by the European Union (EU) to tackle carbon leakage. It establishes a fair price for the carbon emitted during the production of carbon-intensive goods entering the EU, promoting equitable competition, and encouraging cleaner industrial practices.
In the aforesaid paras, there has been a very important term used “Carbon Leakage”.
Carbon leakage occurs when industries decide to set up shop in places where there are fewer rules about pollution. Unfortunately, this doesn’t solve the problem of global pollution; it’s more like a game of musical chairs where the pollution moves around, changing its location but not decreasing.
Let’s illustrate this with an example: Imagine two countries—Country A and Country B. Country A has strict environmental rules and makes industries pay for the pollution they create. Country B, on the other hand, doesn’t have such rules, and its industries might be making goods with a bigger environmental impact.
Now, if Country B’s products are brought into Country A, they might be cheaper because they were made with lower environmental standards. This creates a bit of trouble for Country A’s industries because they have to follow stricter rules and might find it hard to compete. Plus, it doesn’t help the global effort to tackle climate change when pollution just moves from one place to another.
CBAM IMPACT ON INDIA – BRIEF ANALYSIS
Impact on Indian Exports: Indian exports to the EU might be affected by the CBAM, particularly if products carry a substantial carbon footprint. This could lead to increased costs or potential restrictions, impacting the competitiveness of Indian goods in the European market. Consequently, there could be a decrease in exports of carbon-intensive goods such as steel, cement, and chemicals, thereby posing a threat to India’s economic growth trajectory.
Pressure to Reduce Emissions: With the advent of CBAM, Indian industries may face heightened pressure to curtail their carbon emissions. However, this pressure could catalyze positive advancements in the battle against climate change. It serves as a compelling incentive for Indian companies to embrace cleaner technologies and sustainable practices, thereby fostering a more environmentally conscious industrial landscape.
ROLE OF ‘CS’ IN CLIMATE CHANGE:
In contemporary business landscapes, Company Secretaries hold pivotal positions as key managerial personnel within their companies. Their role is central to cultivating robust governance practices and facilitating the advancement of highly effective Boards. With sustainability becoming increasingly vital in the evolving business environment, boards must take on a stewardship role and diligently oversee their company’s sustainability performance.
ENSURING BOARD ROOM SUSTAINABILITY–
BOARDROOM SUSTAINABILITY- IMPLEMENTING CLIMATE CHANGES ON CORPORATE BOARDS:
➢ Over the last two decades, it has become clearer that climate change will have a significant impact on business as it threatens the bottom line and creates risks to balance sheets and supply chains. The disruption caused by physical impacts (i.e. extreme weather, rising sea levels) in addition to impacts associated with the transition to a low-carbon economy (i.e. increased policy, stranded assets), could potentially lead to a variety of risks and opportunities for business. It is the role of the Key Managerial Personnel (KMP) to understand these potential positive and negative impacts and to ensure appropriate actions are taken to address climate-related risks and opportunities.
➢ The Company Secretaries need to inform and make all members of the board, both executives and non-executives, aware and provide a better understanding of climate change and how it might impact their business.
➢ By considering the potential impacts of climate change on their business, boards can get ahead of the curve and be in a better position as the impacts of climate change are realized. Intrinsically good governance should automatically include effective governance of climate-related risks and opportunities. Climate-related risk is part of financial risk and should be addressed in existing governance and risk management processes. However, the unique and complex nature of climate change and the systemic risk it poses to business and society also require special attention, and therefore a proactive and empathetic corporate mindset is needed.
➢ Increasingly, investors are scrutinizing the actions taken by companies to manage climate-related risks and opportunities. An important element of this is the role of the board and senior management in the oversight and management of climate-related issues.
As described by the TCFD* in their Final Report (2017):
“Investors, lenders, insurance underwriters, and other users of climate-related financial disclosures are interested in understanding the role an organization’s board plays in overseeing climate-related issues as well as management’s role in assessing and managing those issues. Such information supports evaluations of whether climate-related issues receive appropriate board and management attention.”
ENSURING AWARENESS AND KNOWLEDGE ABOUT CLIMATE ACCOUNTABILITY ON BOARD TO THE BOD.
CLIMATE ACCOUNTABILITY ON BOARDS
➢ The Board of Directors holds the primary responsibility for overseeing the company’s operations and ensuring its long-term prosperity. This entails acknowledging potential risks, including those stemming from climate change, and taking proactive measures to safeguard the company’s resilience. Failing to address these risks could constitute a breach of the Directors’ fiduciary duties to act in the best interests of shareholders. In essence, the Board’s accountability extends to ensuring the company’s ability to adapt and thrive amidst evolving business landscapes, including those influenced by climate change.
➢ Given that the Board holds ultimate accountability, and a Company Secretary acts as the Spine of a company, it falls on the Company Secretary to take the responsibility of making the Board aware of Climate Accountability and ensuring that it is addressed.
ENSURING THE BOARD IS AWARE OF THE MATERIAL RISKS AND OPPORTUNITIES DUE TO CLIMATE CHANGE-
➢ As stewards of the Company, the Board of Directors must be equipped to effectively debate and make informed decisions, and for the BOD to make informed decisions, the Company Secretary should ensure that they are equipped with Awareness of all the possible material risks and opportunities. Climate change is one such risk. Therefore, the board must have a diverse mix of knowledge, skills, experience, and background to have a sufficiently robust collective understanding of climate-related threats and opportunities.
➢ Climate change is a disrupter to business as usual. Sufficient awareness at the board level will also set the tone for the organization and drive greater awareness of climate-related issues for senior management and staff.
➢ A board might want to consider the steps it has taken to ensure that there is a sufficient breadth and depth of climate change knowledge among its members. This could also be bolstered by training for existing members or looking for climate change qualifications and recruiting new members. Professional Directors may be able to bring specific climate-related subject matter knowledge to the board. External board advisers can also bring climate change knowledge to board meetings, much in the same way that external advisers do so on other topics such as tax or compensation. Finally, it’s important to remember that different approaches to bringing the right subject matter expertise to board meetings will work at different companies. And there really is no one-size-fits-all approach.
ASSIST IN CLIMATE-RELATED REPORTING AND DISCLOSURE
Multinational Corporations often ensure that material climate-related risks, opportunities, and strategic decisions are consistently and transparently disclosed to all stakeholders – particularly to investors and, where required, regulators. Such disclosures are made in financial filings, such as annual reports and accounts, and are subject to the same disclosure governance as financial reporting. The financial institutions and the financial regulators of the G20 economies consider climate risk as a major financial risk. So, with this fact, climate risk should be considered as a major financial risk. The Company Secretaries, being the Corporate Governance professionals, play a pivotal role in this process. The Company Secretary is the core person to review the Board communications and the Annual Report to advise the board from time to time regarding the information to be included in the reports.
STRATEGIC AND ORGANIZATIONAL INTEGRATION
When it comes to the strategic integration of climate governance, it’s important to start by saying that the role of the board is clearly to design or co-design the corporate strategy, and at least to sign it off. So, to do so, boards need to be able and capable of making their strategic planning and decision-making as holistic and informed as possible. At this stage, the Company Secretary’s role in the organization becomes crucial as he will update and make the Board aware of the crises in Climate Action and Opportunities in the form of Carbon Trading like Carbon Credit Trading Scheme or Green Credit Rules, etc., and present the Board with several alternatives to take decisions of strategic relevance.
CARBON BORDER ADJUSTMENT MECHANISM –
➢ With the potential introduction of the CBAM in India, there could be higher tax implications for carbon-intensive products. Company Secretaries in India play a crucial role in ensuring their companies are informed and prepared for the implications.
➢ Company Secretaries need to closely monitor evolving international policies, especially those related to carbon pricing and environmental regulations. ensuring that boards and management are aware of the potential impacts. They play a key role in ensuring that their companies stay compliant with these regulations, reducing the risk of unforeseen challenges.
CONCLUSION-
The narrative of Climate Change unfolds like an epic tale, portraying human actions and the impacts of fossil fuel use, deforestation, and improper waste disposal as central characters. This ongoing saga goes beyond storytelling, demanding collective awakening and concerted efforts for a more sustainable future.
In this intricate landscape, Company Secretaries play a crucial and multifaceted role. Their responsibilities extend from fostering awareness and knowledge about Climate Change to facilitating transparent communication and effective stakeholder management. Serving as linchpins in championing sustainable governance, Company Secretaries should ensure the integration of environmental considerations into the core strategy of the company, fortifying it against environmental risks and ensuring resilience.
Amid the growing emphasis on Climate reporting, Company Secretaries can emerge as pivotal contributors, utilizing their comprehensive knowledge to actively prepare meticulous Climate disclosures. Essentially, they play a transformative role in embedding Climate Change principles into the organizational DNA, paving the way for sustainable success in an ever-evolving business landscape.
IMPORTANT TERMS
o TCFD– is a framework designed to assist companies in providing transparent and consistent information regarding the financial risks and opportunities linked to climate change. Initiated by the Financial Stability Board (FSB).
o IPCC– The Intergovernmental Panel on Climate Change (IPCC) is a United Nations body dedicated to advancing scientific understanding of climate change resulting from human activities.
o UNFCCC– The United Nations Framework Convention on Climate Change (UNFCCC) is an international treaty adopted in 1992 at the Earth Summit in Rio de Janeiro, Brazil, with an objective to stabilize greenhouse gas concentrations in the atmosphere at a level that will prevent dangerous anthropogenic interference with the climate system.
o UNDP-UNDP is the UN’s global development network, operating in 170+ countries to fight poverty, reduce inequalities, and promote resilience. It supports nations in achieving the Sustainable Development Goals through expertise, policy advice, and financial aid, focusing on governance, sustainable development, and climate action.