As one of India’s largest foreign investors, it’s time for Blackstone to invest in renewables. The investments till date have been largely transactional. To be truly impactful, Blackstone needs to become a transformational player.
https://ieefa.org/blackstone-could-provide-indian-energy-security-a-strong-boost/
Ms. Hetal Dalal is the Chief Operating Officer of Institutional Investor Advisory Services India Limited (IiAS), a SEBI-registered India-based proxy advisory firm. Her role includes voting recommendations published annually by IiAS on over 800 listed companies that aggregate over 95% of the total market capitalisation on Indian exchanges. Also, the oversight of the governance research published under IiAS’ that enhances market participants’ understanding of best practices. Hetal leads IiAS’ efforts in working with International Finance Corporation (IFC) and BSE Limited on the Indian Corporate Governance Scorecard, which assesses Indian companies on their corporate governance practices. She provided oversight to the ESG assessment framework developed by IiAS: IiAS is the first domestic agency to have created such an assessment framework.
Hetal is a Chartered Accountant and holds a management degree with a specialisation in finance from NMIMS Mumbai. It was my pleasure speaking to her on a host of subjects including Women on Boards; Corporate Governance; Fiduciary responsibility; ESG and Sustainability.
Praveen Gupta (PG): Your last report Corporate India: Women on Boards was truly pathbreaking. How has been the real progress since then?
Hetal Dalal (HD): There has been a lot of progress since our 2017 report on Women on Boards. There are a greater number of women on boards and an increase in the number of directorships being held by women. Almost 45% of NIFTY 500 companies now have two or more women on their boards and there are three companies that have five women on their boards. From an overall board composition perspective, 27% of the NIFTY 500 boards have women that comprise over 20% of the board, up from 11% on 31 March 2017.
Almost 45% of NIFTY 500 companies now have two or more women on their boards and there are three companies that have five women on their boards.
The regulatory change requiring the top 500 companies to have at least one woman director has had limited incremental impact – at the time of our 2017 report, 69% of the NIFTY 500 companies already had one Independent Woman Director – on 30 November 2019, 91% of the companies have at least one woman director. Despite the improvement, India remains well behind other markets that have targeted at least women representation at 30% of board composition.
PG: ‘The plethora of well-meaning men and organisations that have sprung up to “mentor” and “train” potential women directors are more patriarchal than progressive in their prescriptions, reflecting a poor understanding of what inclusion is really about’. Any thoughts on this observation by Ms. Rama Bijapurkar?
HD: I tend to agree with all the arguments that Ms. Bijapurkar has made in her article. The quota for women is being brought to correct a generational or a systemic defect – but that does not take away the argument of meritocracy. Sure, having training is important – and even companies are required to conduct ‘familiarisation’ programmes for its directors. But, one can neither be effective nor command the respect of peers because one has simply undergone a training programme. For all directors – not just women – having their own mettle is important.
PG: While pressure is growing on fund managers to pay greater attention to environmental and social issues, is there a realisation that ESG and impact investing can generate strong financial returns as well? According to Bloomberg – nine of the biggest ESG mutual funds in the U.S. outperformed the Standard & Poor’s 500 Index last year, and seven of them beat their market benchmarks over the past five years.
HD: Several domestic funds are now focused on ESG. We believe the asset managers are clearly seeing the value of ESG, and in several instances also being compelled by their own investors / unit holders, to focus on ESG. With stewardship codes now becoming mandatory for almost all asset classes, it will propel the focus on ESG factors. While this is still relatively new for Indian markets, we believe the pace at which ESG will become a centre stage conversation will be quick.
We believe the pace at which ESG will become a centre stage conversation will be quick.
PG: Some asset managers believe that not considering ESG exposes legacy investors to uncompensated risks and may even constitute a breach of fiduciary duty?
HD: Although most of the ESG tracking seems to be in chase of long-term returns and attracting capital, there is a coterie of asset managers that believe ESG factors do expose investors to uncompensated risks. There have been ESG failures that have resulted in sharp deterioration in market capitalisation resulting in losses for investors. At the same time, there is a need for investors to be more discerning around how to proactively factor in ESG – for a large part, investors (and the market) is reactionary. Even so, I don’t think asset managers in India consider this to the extent of interpreting it as a failure of fiduciary responsibility.
PG: Do you think Climate Change is becoming an important agenda for enlightened Indian boards? Measuring Sustainability Disclosure: Ranking the World’s Stock Exchanges 2019, both Bombay Stock Exchange and National Stock Exchange of India rank 37th worldwide. How do we move up?
HD: 38 of the NIFTY 100 companies are signatories to CDP Worldwide (Carbon Disclosure Project), which shows that climate change is a focus for corporate India. However, only in 9 companies have the sustainability objectives been embedded on executive directors’ performance goals. One could conclude therefore that while climate change is being addressed through business, the focus on this at board levels is still limited.
The increasing issuances of green bonds is also testimony to the fact that not just companies, but investors too are showing an increased focus on sustainability.
The Indian exchanges consider their dominant role to be one of providing a platform for exchange. They do not pursue an agenda, believing that this may compromise their position as an unbiased market fiduciary. Therefore, the first step will be for exchanges (and perhaps the regulators) to redefine their role as influencers of Indian markets.
While climate change is being addressed through business, the focus on this at board levels is still limited.
PG: Indian Corporate Governance Scorecard framework developed by you jointly with the International Finance Corporation and the BSE – to what extent can it facilitate underwriting management liability exposures of individual corporates rated here?
HD: Our research shows that companies that score well on the CG Scorecard (score of 60 and above) have outperformance the index over a two-year period. Their stock beta (volatility) also tends to be lower than companies that do not score well on the CG scorecard. Clearly, equity markets seem to attach a premium to governance quality. Similarly, from a liability perspective, it can be interpreted that companies with a good governance score, in effect, are likely to have a lower probability of governance failures.
PG: Many thanks, Ms. Dalal. Truly appreciate these wonderful insights. My best wishes for all your endeavours.
Translation in simplified Chinese by InsConsulting Team:
Our banks, insurers and asset managers will assume significant scale with growing penetration. There could not be a better timing to align individual lifestyles and aspirations with the country’s sustainability goals as well as those of all financial institutions…
Walter Murphy and Praveen Gupta in conversation on the Preventable Surprises blog. Preventable Surprises, to quote them, is a London based ‘think-do’ tank that seeks to drive behaviour change within the investment sector to help prevent major market dysfunctions. In an increasingly complex and polarised world, Preventable Surprises creates a safe and creative space where ‘positive mavericks’ inside the investment system, scientists, policy experts and corporates can collaborate. The outcome is lasting change that benefits investors and corporates that have a long-term focus and thus society at large. Their major programme focuses on climate related systemic risk and is called ‘Forceful Stewardship’. They are also engaged in work relating to ESG leadership, sell side research and investment scenarios:
Externalities are fascinating. Perhaps a bit too daunting for the imagination of bean counters. It is not just the accountants that I am alluding to but the actuaries, rank & file and the risk managers. Economists included. The provocation for the latter comes from Inside Out Economics: Are Externalities the Main Event? (by Duncan Austin) and so does much of the (‘beyond)meat’ to reinforce my conviction.
If risk-management is indeed meant to make governance robust – the function ought to shed its myopia. ‘Tell us more’ said the chairman of a risk committee in response to my choice of the phrase. So, I alluded to Nassim Taleb’s ‘hindsight bias’ followed by a case for liberal arts education as an antidote to myopia. Coz bean counters, I said to him, left to themselves are a risk to the risk function!
How do we de-risk our businesses to ensure their sustainability as well as our planet’s? In response to US treasury secretary Steven Mnuchin’s suggestion that the champion of Climate Change – Greta Thunberg – must study economics, the author Duncan Austin has something specific to say. “Yet possibly what Greta has noticed is that many of society’s influential decision-makers are either formally trained or well-practiced in economic thinking and still struggling to find convincing remedies to our sustainability crisis. Perhaps the way we have been teaching economics is part of the problem?”.
While the author does not undermine the role of economics as a valuable body of knowledge – he bemoans “downplaying the significance of one of its own discoveries made exactly a century ago” which “has potentially calamitous real-world consequences”. To get under the skin of this hard hitting truth – everyone word in the following quoted text must be read.
“Pigou’s inconvenient truth
In 1920, Arthur Pigou, a Cambridge economist, conceived the idea of externalities to describe how market transactions may create unintended harms or benefits for which no monetary compensation or reward occurs.
For example, one study estimated the monetary value of the ‘services’ provided free by the Earth’s ecosystem at $125 trillion in 2011, nearly twice the value of global GDP (gross domestic product). That is just an estimate of certain ecological values ignored by the market. Important social values are missed as well. In the UK, unpaid housework in 2016 was estimated at about 65 percent of GDP – another huge block of nonmarket value. These two studies alone indicate that measured GDP captures about a third of some larger conception of value.
Such estimates suggest that it is not that the market doesn’t capture all things of value, it doesn’t even capture most things of value. Far from externalities being peripheral, they may be the main event!
We have a sustainability challenge because the entire financial system repeats the problem of the discredited EBITDA metric at the level of the whole economy. This is the invisible conceptual cage we have wrapped around our decision-making and from within which the ESG movement is frantically trying to make a difference. Alas, given the incompleteness of our markets, the ESG movement increasingly resembles a hopeful grafting of good intentions onto an unchallenged accounting reality that remains the largely intact source of our problems.
So, every single financial metric on the Bloomberg screen is a BESDA (‘before ecological and social depreciation and amortization’ basis) metric – profits-BESDA, earnings per share-BESDA, return on capital-BESDA, return on equity-BESDA, etc. The millions of financial numbers processed daily by our increasingly automated markets – which, in turn, steer our economy and drag our culture along behind, ripping up nature in its wake – are all BESDA numbers. It might not only be EBITDA with which we’re conning ourselves, but every financial number in the book. They all represent different degrees of disembedded value, some of which we have unmasked, some of which we have not.”
How does all this tie in with insurance economics?
Let us leave aside the logic or illogic of pricing models, the adequacy or inadequacy of the time frames in which they are expected to operate and the obsession with predictability. Asbestosis by hindsight looks very probable (as Mr Taleb would put it) but the shortsightedness which brought upon all the attendant woes – meant you were collecting too little a premium and something unforeseeable was beyond your imagination. It would be interesting to dig into actuarial signoffs. A formal risk management function was absent, but someone was responsible for something akin. Underwriting profitability – then as it is now – takes a back seat. Lloyd’s almost went broke. Pricing continues to be a mockery, thanks to the seemingly endless supply of ‘alternate capital’.
Climate Change is not a peril priced for. Together with Cyber and aspects of D&I, these three externalities – constitute biggest of the risks. Too far and out of their boxes. Valuation of insurance entities is an addiction that generally induces the insurance industry to gloss over a sustainable price. Many covers like motor third party (GHG / health consequences), pollution and contamination would not pass the sustainability test for not only these run counter to the risk carriers’ sustainability but more importantly our Planet’s too. When car sales fall (including diesel fuelled) insurers panic as their auto portfolio shrinks – not for a moment is there a sense of rejoice that there could be resultant reduction in emissions meaning less impact on the health of those who end up inhaling it.
Is there some unintended good? From outside the blinkers of all concerned arrived – what I like to call Post Millennials – they are not meek, and shall inherit the earth. It is very much in our interest that they join the shareholder activism – cut through the bureaucratic barricades, recharge the imaginations of all those in serious need of getting externalities inside the pricing models! An art of liberating all forms of bean counting…
As urban spaces expand – many historical, architectural and natural sites of significance fall by the wayside. Increasingly neglected, into disrepair and struggling to survive. Charming Udaipur seems headed in this direction, too.
While I am finalising my presentation Climate Change: Elephant in the Boardroom! for the Insurance Law Association, I am equally engrossed in Raavan. The gripping fiction by Amish Tripathi, based on the Lankan king, devil incarnate in the Ramayana. With the story unfolding, I begin to believe that this Lord of evil is the polluter, pollutant and pollution – the unholy trinity! And that a single deviant can radically vitiate the overall climate.
To be the last speaker of the day calls for extra vitality both in terms of what you wish to present and how. Therefore, nothing like fortifying the narrative with real stories. Sometimes, what others tell you lends a whiff of oxygen. And sometimes what you have said something – somewhere else – gives a new context to your fresh explorations. Most interestingly it’s what an another might tell you without even having to ask, after you have delivered your story, that triggers a new insight.
How about the last thing first? So, at my presentation I seriously fret and fume about everything that is going wrong with our lovely Planet. Coal, the king of fossil fuel and blackest of them all, is at the very epicentre of the trouble! Once I am all done and settle down for an Uber ride home – I am wishing to cool down. Expecting it to be a quiet trip. However, the driver Rahul has other plans.
That he is from some place called Deoghar, by the Mayurakshi river, in Jharkhand is an inert input. Given my equally inert response – it is his turn to lace it up. ‘That’s where Raavan left behind the Shivalinga’ was something I was least expecting to come my way. He then tops it by saying how coal is abundant and virtually free around Deoghar. Not surprised by the fact that it is right in the heart of India’s coal belt. Not too far apart Jharia where fires have been raging for over 100 years, like uncontrolled demons, in the coal pits. Free and plentiful supply makes it a darling and an addiction. Leaves me wondering whether he can read my mind or was he present at the just concluded event, that evening?!
Late 2017 I ‘crystal ball gazed’, to write a blog on invitation from the CII (A leaf from the Chartered Insurance Institute Blog!), as to what lay in store for 2018. One trend that I talked about was the non-state players taking on the role of influencers. Emerging charisma of individuals was in mind too – particularly Sian Fisher (CEO of the CII) in context of her inspiring ‘HeForShe’ initiative. That was how far I could think at that point of time. Greta Thunberg was nowhere in sight. Perhaps just a fourteen year old then. Early last year at the Asianinvestor panel discussion on megatrends, in Hong Kong, the context of leadership evolved and I dared to say that ‘Post Millennials’ like Greta should be sitting on the boards of corporations. Howsoever, naïve it might still sound, the urgency to cut on our carbon footprint calls for Raavan-of-a-Climate-Crisis slayer like Greta.
With the rising sea level much of Mumbai will be under water by 2050 – I tell my friend quoting New York Times. This is before the local media breaks the story, a few days ahead of my presentation. I am surprised that he is not surprised and tells me what his late grandmother said. Lending more than a whiff of oxygen. The paternal grandma used to attend to the needs of a spiritual lady one Shantabai. Sometime between 1925 to 1941 – during her spiritual journey – the name Ramtanu was bestowed upon her. Shantabai visualised a great city emerging from the Sea, where Navi Mumbai stands today. More importantly, she also told the grandmother that in about 100 years the sea would claim the city back! In Turbhe (once a village), now a suburb of Navi Mumbai, stands a temple dedicated to Ramtanu that is believed to protect all its residents.
There are signals galore! Are we willing to be not distracted by the noise? Uncanny or uncanny not?!
Published in Business Standard on December 28, 2019: https://www.business-standard.com/article/current-affairs/the-crucial-role-of-banks-and-insurers-in-reducing-greenhouse-gas-emissions-119122800822_1.html (Paywall)
2020 will not be yet another new year! With it commences the countdown to 2030 by when together we must all – individuals and businesses – work towards achieving the expectations set by the Paris Climate Agreement. Insurers have not only been generally slow in waking up to this challenge, but many continue to ‘aid and abet’ the Climate Crisis. The growing role of Asia in global economy, higher propensity to natural catastrophes and an aging society – makes it more vulnerable to Climate Crisis than any other geography.
As an inspiring leader, Sian Fisher, CEO, Chartered Insurance Institute, has demonstrated how the insurance industry can successfully lead the financial services in the Diversity & Inclusivity space. In this interview, Sian shares her vision on dealing with Climate Change, how some of the European players are already leading the way, a transitioning protocol to mitigate the carbon trail and some of the pathbreaking work undertaken by the Chartered Insurance Institute. (Also published on the CII blog).
PG: How could and should insurers and reinsurers influence businesses responsible for carbon emissions?
SF: There are four key ways in which insurers can influence carbon emissions:
Most importantly, insurers can help organisations look at risks in a holistic way, advising them on how they can manage climate risks and manage reputational, regulatory, legal, technological and physical risks. As a member of the organisation Climatewise, we have sponsored guidance on a ‘Transition Risk Framework’ for use by our members:
Second, during the underwriting process, insurers can look at the total risks of a project, including the potential reputational and regulatory risks of activities that result in high carbon emissions, and factor this into pricing. However, it is more effective to have a dialogue with clients before the underwriting process, either between the insurer and the client, or between the broker and the client, about managing the risk, rather than waiting for the pricing stage of the process, when decisions may have already been taken that may not be able to be reversed. We should also remember that pricing decisions can work in different ways. For example, timber-framed buildings are attractive from a carbon point of view, but can be more vulnerable to fire in the construction stages, and if they are not maintained properly. As always, it is important to look at all the risks of a project, and not just one aspect.
Third, insurers can approach the way they invest their funds in a way that is sustainable from a carbon point of view, as Zurich, Aviva and many other insurers have done:
https://www.aviva.com/social-purpose/responsible-investment/
Fourth, during the claims process, insurers can help repair and rebuild so that replacement structures are more carbon efficient.
PG: Increasingly, more and more European insurers and reinsurers are moving away from investing in fossil fuels. Would you expect this to be replicated globally?
SF: Yes, there are strong reasons for moving away from fossil fuels in terms of avoiding reputational or legal risks. In future, it is likely that governments will develop more financial incentives to encourage investment in and use of renewable energy rather than fossil fuels, so in the long term this does make sense.
PG: Do you see room for Climate Change as a standalone subject in insurance and risk management syllabi?
SF: Many people think of the CII and think of exams straight away, but people tend to take exams early in their career, and then look for a wider range on ongoing materials and training to keep their knowledge up to date. As a result, we would like to integrate climate change into many of our syllabi (as we already do, for example for investment advisers) and then offer tailored materials and CPD, such as the Transition Risk Framework to members. That way, we can reach all our members, and not only the ones that are in the exam phase of their professional development.
We would like to integrate climate change into many of our syllabi (as we already do, for example for investment advisers) and then offer tailored materials and CPD, such as the Transition Risk Framework to members.
PG: In your view, is there a role for insurers in transitioning societies towards a carbon neutral existence?
SF: Yes, insurers exist to help individuals, families and organisations to manage risk. Climate change is one of the biggest risks we face, so insurers naturally have a huge role to play in helping society manage it.
PG: Many thanks. Here is wishing you Merry Christmas and A Happy New Year!
The Diversity Blog 