CFO India - January 2010 by Bhupinder Sharma

THE ROAD AHEAD AZIM PREMJI CALLS FOR COHESIVE ACTION p.10

GREEN EVANGELIST WIPRO’S CFO SAYS THERE’S NO SUBSTITUTE FOR HARD WORK p.20

CFO INDIA

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NAKED TRUTH FIRMS MUST SEE THE WRITING ON THE WALL p.46 VOLUME 01

ISSUE 03

Rs.50

A 9.9 MEDIA PUBLICATION JANUARY 2010

INDIA cfo-india.in

CFO

GREEN SPECIAL OPPORTUNITY STRIKES

OPPORTUNITY

STRIKES IT’S EASY BEING GREEN AS THE CLIMATE BOMB TICKS AWAY p.14

OFFICE SPACE

p.30

GREEN BUILDINGS WILL BOOST PRODUCTIVITY AT WORK

CLIMATE CHANGE 101

p.36

GLOBAL WARMING: WHAT CFOs MUST KNOW

NEW TRIPLE BOTTOM LINE

p.32

CFOs SHOULD TAKE ON MORE RESPONSIBILITIES VOLUME 01 | ISSUE 03

GREEN MONEY

p.50

LEAD THE BIG SHIFT TO SUSTAINABILITY

IN THE DEAD SEA

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EFFORTS ARE ON TO CHECK WATER SHORTAGE IN THE SALT LAKE

CFO

contents JANUARY 2010 VOLUME 01, ISSUE 03

20 Suresh Senapaty

GREEN SPECIAL

cover story

14 OPPORTUNITY STRIKES

Climate change offers scope for a business revolution By Bennett Voyles

cfo profile

10 Azim Premji

20 THE GREEN EVANGELIST Wipro’s CFO talks about himself, his company’s future By Ullekh N.P.

view from the top 10 THE LONG ROAD AHEAD We must act together to build a sustainable society By Azim Premji

big picture 46 THE GO-GREEN DRIVE There are rays of hope and clouds of despair CFO India Bureau

in practice 30 GREEN SPACES Save energy, boost productivity at work By Kamal Meattle

32 BUSINESS PERFORMANCE

COVER DESIGN BY JAYAN NARAYANAN

CFOs must take up more responsibilities By Gary Cokins

12 Rajendra Prasad

40 INSURANCE The past decade saw large-scale economic advancement By Vikram Kotak

42 GREENHOUSE GASES The next step to combat global warming By Mohan R Lavi

44 RISK MANAGEMENT Ways to manage risks in a dynamic business environment CFO India Bureau

cfo lounge 52 GIZMOS 53 TRAVEL 03

from the editor’s desk

letters to the editor topline i think insight leader’s world art review books

36 CLIMATE CHANGE 101

You can make a difference with renewable energy By Robin Banerjee

38 ACCOUNTING Concerted efforts are required to ensure a cost-effective transition to IFRS By Ullekh NP AD INDEX

50 54 56

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from the editor’s desk ANURADHA DAS MATHUR editor@cfo-india.in

INDIA cfo-india.in

MANAGING DIRECTOR: Dr. Pramath Raj Sinha

The world is not (green) enough

WE WILL NEVER know what corporate India’s pro-activity in the past could have done for the issue of climate change. But we have some idea of what we can do now. There is ample evidence that the climate-change movement is impacting businesses (and life fundamentally). It is high time that we stop debating over “if” and “whether”, and get down to action.... I probably belong to a minority, but to me, the “green movement” has never been one that needed to be “dodged”. While it has more than its fair share of publicity-hungry activists, for the most part, there is an opportunity staring us in the face; we must grab it with both arms, especially CFOs ... this is because the costs of going green are inevitable—like one of our contributing editors says, it is like a new, irrevocable tax. While experts are talking about factors that will increase the costs of doing business if we choose to grow “sustainably”, the list is yet incomplete. What I haven’t heard mentioned much are expenses related to enhanced activism, litigation, and disclosure on environmental performance. If reporting is altered to include “sustainability” parameters, there will be a whole new dimension added to the work that CFOs do. Besides the workload, there will be a need to “upskill” finance teams. Needless to say, there is a fair bit of learning for CFOs as well! But these are unavoidable expenses and that too, for a good reason.… Therefore, it may be a good time for CFOs to ask whether they can deliver commensurate or disproportionately higher revenues or indeed reduce other costs to keep the balance.... My bet is, yes.... But not too many CFOs have actively contemplated diversification for their companies that can deliver a new “environmentfriendly” line of business. Can CFOs respond to “green consumerism” and align environmental and economic goals of businesses? Could they begin to view environmental sustainability efforts through a new prism: profiting from saving the planet? The only limits are those of vision.… Please write to us with your “green” thoughts, ideas and initiatives.… My best, always.…

EDITORIAL CONSULTING EDITOR: Ullekh NP CONTRIBUTING EDITOR: Bennett Voyles DESIGN SENIOR CREATIVE DIRECTOR: Jayan K Narayanan ART DIRECTOR: Binesh Sreedharan ASSOCIATE ART DIRECTOR: Anil VK MANAGER DESIGN: Chander Shekhar SENIOR VISUALISERS: PC Anoop, Santosh Kushwaha SENIOR DESIGNERS: TR Prasanth & Anil T THE CFO INSTITUTE EXECUTIVE DIRECTOR: Deepak Garg NATIONAL HEAD: Bindu Krishna MANAGER: Poonam Bhargava ASSOCIATE: Priyam Mahajan SALES & MARKETING V-P SALES & MARKETING: Naveen Chand Singh NATIONAL MANAGER (SALES): Pranav Saran (+91-9312685289) NATIONAL MANAGER (EVENTS & SPECIAL PROJECTS): Mahantesh Godi (+91-9680436623) NATIONAL MANAGER (ONLINE): Nitin Walia (+91-9811772466) ASSISTANT BRAND MANAGER: Arpita Ganguli SOUTH: Vinodh Kaliappan (+91-9740714817) NORTH: Vipul Goel (+91-9654447689) WEST: Sachin N Mhashilkar (+91-9920348755) PRODUCTION & LOGISTICS SENIOR GENERAL MANAGER (OPERATIONS): Shivshankar M Hiremath PRODUCTION EXECUTIVE: Vilas Mhatre LOGISTICS: MP Singh, Mohamed Ansari, Shashi Shekhar Singh OFFICE ADDRESS Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AND PUBLISHED by Kanak Ghosh for Nine Dot Nine Interactive Pvt Ltd C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India EDITOR: Anuradha Das Mathur C/o K.P.T House, Plot 41/13, Sector-30, Vashi, Navi Mumbai-400703, India PRINTED AT Silverpoint Press Pvt. Ltd. D 107,TTC Industrial Area, Nerul, Navi Mumbai-400706

SUBSCRIBER SERVICES: Call +91-11-45069999 Visit CFO India’s Website

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letters to the editor CHIEF FOCUS INFOSYS CEO TALKS ABOUT THE NEW ROLE OF CFOs p.14

WINNING SMILE SK JOSHI’S POWERS OF PERSUASION PUT BPCL ON TRACK p.24

CFO INDIA

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GREEN SPECIAL

TOP PRIORITY CFOs AND CIOs MUST WORK HAND IN HAND p.44

INDIA cfo-india.in

HOT PURSUIT

HOT PURSUIT Companies find it easier to raise money than get the right people to handle it

p.18

The big race

VOLUME 01 | ISSUE 02

VOLUME 01 ISSUE 02 DECEMBER 2009

PUBLIC ATION

DECEMBER 09 VOLUME 01 ISSUE 02 Rs 50

JOB MARKET IS PICKING UP “From the Editor’s Desk” column of the last issue offered an interesting read.… Yes, I see some changes in the market with clients floating new inquiries, expanding their vendor base, etc. All this will definitely lead to the opening up of the job market and I agree with the editor’s views. —Hitendra Kale, senior vice-president, operations (Americas) and treasurer, Onward Technologies Inc

The cover story is superbly written (Where’s the talent?). The cover design also looks brilliant ... Bennett Voyles has handled the talent crunch debate with impeccable ease. —Arun Ram, Chennai

A GOOD BEGINNING The magazine is pretty good, both in terms of quality of writing and printing … there are good names from India Inc backing this effort and that certainly helps. —Rajesh Magow, co-founder and chief financial officer, MakeMyTrip travel portal

IMPRESSIVE LOOK I am extremely impressed with CFO India! I am looking forward to the next issue. —Anil Parashar, group CFO, Interglobe Enterprises

A QUESTION OF CHOICE

CFO India looks very impressive. —Muthu Ranganathan, vice-president, Enterprise Performance Management, Keane

CFO India is meant not just for finance professionals, but also for finance journalists who can learn a lesson or two in choosing thought-provoking subjects ... the cover story is really good. So are other articles—CFO profile, McKinsey’s story, etc. —VE Krishna Kumar, San Jose, US

BEST WISHES

INSPIRING WRITE-UPS

I am sure the team at CFO India will endeavour to bring in excellence at every stage. I wish you all plenty of success! —Sundeep V. Bambolkar, director-finance and operations, Indoco Remedies Ltd

The profiles of CFOs in the last two issues were good and inspiring. The cover story in the last issue—titled Hot Pursuit—did paint a big picture of talent shortage in India. And as always, McKinsey articles were very informative and useful. Books and travel write-ups were good, too. I will look forward to the next issue of the magazine. All the best! —Archana Chaudhary, Mumbai

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01.10

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GREEN SPECIAL

topli CHECKING INFLATION

We are the authors of our own disasters

PHOTOS.COM

—Latin proverb

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RBI steps in to tame the demon TO SUCK OUT SURPLUS LIQUIDITY FROM THE FINANCIAL SYSTEM AND CHECK food inflation from spilling into the wider economy, the Reserve Bank of India (RBI) has raised banks’ cash reserve ratio (CRR) by a higher-than-expected 75 basis points, to be implemented in two phases. It has left its short-term interest rates unchanged. CRR is the percentage of funds that the banks have to keep with the RBI. If the RBI decides to increase this percentage, the amount available with the banks comes down. Food inflation had come down to 16.81% in the week ended 9 January after spotting the 20%-mark in December, the highest in a decade. High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till

ne September last year. “Though the inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process,” India’s central bank said in its third-quarter review. However, it left its lending rate, or the repo rate, unchanged at 4.75% and its reverse repo rate, at which it absorbs surplus cash from banks, unchanged at 3.25%. The Reserve Bank of India has been under pressure from senior government officials to hold off from raising its policy rates, which they argue would undermine economic recovery, said a Reuters report. The central bank lifted its wholesale price index inflation forecast for the end of the fiscal year in March to 8.5% from its earlier forecast of 6.5%, but said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels, the report added. It also lifted its forecast for GDP (gross domestic product) growth in the current year to 7.5%, from an earlier target of 6%, and said that the current rate of growth is likely to be sustained in the financial year that ends in March 2011. A Reuters survey had showed 24 out of 25 economists expected the RBI to raise bank reserve requirements, or the cash reserve ratio, by up to 50 basis points. Between October 2008 and January 2009, the central bank had cut the CRR by a total of 4 percentage points in five moves as it stepped in to support the economy during the global financial crisis. The RBI had cut the repo rate by 4.25 percentage points in six steps between October 2008 and April 2009. The reverse repo rate was cut by 2.75 percentage points in four steps since December 2008. According to a Reuters report, the RBI has joined other central banks in Asia in taking steps to start unwinding ultra-loose monetary policy. The Philippines has raised short-term lending rates, and China has started to tighten policy by raising banks’ reserve requirements and accepting higher yields at bill auctions.

EXPERTS SAY THE ECONOMIC RECOVERY IN THE COUNTRY IS BROAD-BASED.

FACTORY OUTPUT

Growth momentum picks up further India’s industrial output in November grew at its fastest pace in two years. The Index of Industrial Production (IIP) numbers rose by 11.7% in November 2009 as against 2.5% a year earlier, fuelled by the demand for manufactured goods. Experts say the numbers clearly show that the economic recovery in the country is broad-based, an assessment that is strongly backed by the performance of specific industries. Manufactured goods, which have around 80% weightage in the index, rose by 12.7% in November 2009 from 2.7% in the same month a year ago. The mining output was up 10% and power generation rose 3.3% during the same period. The industrial output growth in the fiscal year to March 2010 will be higher than 2.6% recorded in the last financial year, deputy chairman of Planning Commission Montek Singh Ahluwalia said. Reports also quoted him attributing the likely rise in industrial production to various stimulus measures initiated by the Central government. The IIP data announcement is expected to boost the case for higher interest rates although the central bank, the Reserve Bank of India (RBI) is expected to wait for further signs of sustained recovery before tightening the monetary policy. “In what has turned out to be a very public debate, it is obvious that while the RBI is thinking hard about the first rate rise, the minister of finance (and no doubt most of the government) is strongly against an early move,” wrote Robert Prior-Wandesforde, HSBC senior Asian economist, in a note.

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GREEN SPECIAL RIGHT SIGNAL

Budget funds likely for green missions INDIA’S EIGHT AMBITIOUS MISSIONS TO address climate change are likely to get funds in the Union Budget that will be presented in Parliament next month, a news agency report said quoting a senior official. “The ministries implementing the missions will be provided the necessary budget for it. We are tying up funds domestically,” Prime Minister’s Special Envoy on Climate Change Shyam Saran said recently when asked whether there would be any allocation for the eight missions in the Union Budget 2010. He said each of the missions would be discussed at the Planning Commission and will be incorporated in the Plan. “The Government has taken a decision on implementing it. Of course, they will provide funds,” Saran was quoted as saying by the news agency. Prime Minister Manmohan Singh launched the National Solar Mission that aims to generate 20,000 MW solar power by 2022 recently. The mission is one of the eight announced as India’s National Action Plan on Climate Change. Meanwhile, the ministry of new and renewable energy is pushing the finance ministry to give income tax rebates to people who are making use of solar power in their everyday life.

INSURANCE POLICIES

Digital twist India’s insurance regulator Insurance Regulatory and Development Authority is likely to approve a plan to make available insurance policies in digital format for buyers, a report said. Policy holders now keep paper copies of each transaction over the life of the policy. This shift is seen to help cut costs and bring in transparency.

CLOSER WATCH

PHOTOS.COM

Rating bodies to come under increased scrutiny IF A HIGH-LEVEL PANEL’S RECOMMENDATIONS GO THROUGH, all credit rating agencies will have to disclose their earnings from rating services they offer companies and also from their non-rating business, according to a Press Trust of India report. The committee, in its report on “comprehensive regulation for credit rating agencies” said, “There may be greater disclosures regarding materially significant revenues received from a particular issuer and nonrating business like advisory services.” The committee, comprising officials from the Finance Ministry and some other federal regulators, also added that rating agencies “should not be allowed to enter into any business that may directly or indirectly have conflicts of interest with their basic job of rating.” 8

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PLANS ARE AFOOT TO BRING IN A COMPREHENSIVE REGULATION FOR CREDIT RATING AGENCIES

topline

Death and destruction in Haiti HAITI LOST 60% OF ITS GROSS DOMESTIC PRODUCT (GDP) IN JUST 30 seconds, when a massive 7.0-magnitude earthquake hit the Caribbean nation on 12 January, killing more than 2 lakh people and smashing capital Port-au-Prince, which has, over the past few decades, seen rapid development and migration from the countryside. The country’s prime minister Jean-Max Bellerive told an emergency meeting to discuss reconstruction efforts that the quake-ravaged Haiti needs at least five to 10 years of help from the international community after its people were “bloodied, martyred and ruined” by the quake, Reuters quoted him as saying. A key theme that emerged at the emergency meeting attended by some powerful people from across the world was the importance of ensuring that development and population was not so concentrated in Port-au-Prince, which sits right on a fault line, the report added. “The people of Haiti will need more and more and more in order to complete the reconstruction,” Bellerive told the international aid conference, intended to survey immediate needs and BRIGHT FORECAST then begin plotting Haiti’s long-term recovery. “I bring you the thanks of a people who have been bloodied, martyred and ruined but who are standing,” he told U.S. Secretary of State Hillary Clinton, Canadian Prime Minister Stephen Harper, French Foreign Minister Bernard Kouchner and representatives of 10 other countries, according to the report. Haiti’s worst quake in two centuries wrecked the presidential palace, United Nations offices and other buildings. On her part, Clinton said agriculture, which can act as a magnet back to the countryside, had not gotten the attention it deserved. “I was quite heartened to hear the prime minister say that ... we should look at how we decentralize economic opportunity and work with the Haitian governGROWTH RECOVERY IS TAKING PLACE AT DIFFERENT SPEEDS AROUND THE ment and people to support resettlement,” she was WORLD. THE EMERGING MARKETS ARE RELATIVELY VIGOROUS. quoted by Reuters as saying. There are also growing concerns about the THE INTERNATIONAL MONETARY FUND (IMF) has said that the health of those in hundreds of makeshift camps. global economy is recovering faster than previously anticipated Meanwhile, several celebrities, including some and will grow 3.9% this year and 4.3% in 2011. India is expected to Hollywood icons, have joined the relief efforts. expand 7.7% this year and 7.8% next year, much better than previActor John Travolta has sent his plane to provide ous forecasts. China, the largest emerging economy, will expand relief materials to the survivors. He added: “My 10% this year and 9.7% next year. church has also arranged for 80 medics and 33 The IMF said it had revised upwards its earlier forecast for global volunteers to go down there. I hope that inspires growth by 0.75 percentage point from the October 2009 forecast. others as well. We sent a plane down already, and But the recovery is proceeding at different speeds around the we’re sending another one down Monday.” world, with emerging markets, led by Asia relatively vigorous, but Other celebrities including Madonna, Wycleaf advanced economies remaining sluggish and still dependent on Jean, George Clooney have also donated for the government stimulus measures, the IMF said in an update to its cause. World Economic Outlook.

IMF upbeat on world growth

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POOR PLANNING

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view from the top

GREEN SPECIAL

AZIM PREMJI

Facts & Trivia

ZODIAC SIGN:Leo

EDUCATION: St Maryâ&#x20AC;&#x2122;s School, Mumbai; forced to quit studies in electrical engineering from Stanford University to take over family business in the 1960s HONOURS: Padma Bhushan, D. Litt. from Aligarh Muslim University and an honorary doctorate from Wesleyan University, Connecticut

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THE CHAIRMAN OF WIPRO LTD

says organisations must address ecological and social challenges while looking at business opportunities. They must view economics and ecology as two sides of the same coin, he adds.

view from the top

ahatma Gandhi once said, “The earth provides enough to satisfy every man’s need, but not every man’s greed.” This sums up the issues of global warming and natural-resource depletion that lead to ecological unsustainability. I think it is fairly clear to all of us by now that there are multiple dimensions to the ecological problems that the global society is facing. Climate change is perhaps the issue that is mostly there in media headlines. However, there are equally serious issues. Depletion of fresh-water availability, rapid bio-diversity loss, contamination of land, water, air and depletion of natural forest cover are just a few of them. And all of them are inter-related. All this is not only an existential issue, but also an ethical issue. This is because ecological issues affect the poorest most severely: the poorest get hurt the worst and have the least resources to cope. Also, mankind has a responsibility towards the planet and its ecosystem—given its power to impact the environment. The situation will become even more complex as the human population on the planet will continue to increase, through to the middle of this century, to about 9.5 billion from the current 6.7 billion. I think we must act together and address these issues head on, to build a sustainable society. Fundamental ecological and social changes don’t happen overnight, nor can they happen merely through policy changes. While policies are essential and they do facilitate change, they are not adequate enough in kick-starting change. The real change begins when small groups of committed people take the lead and ignite the change process. Organisations cannot be focused on profit alone. In the long run, that is not sustainable. They need to view ecology and economics as two sides of the same coin. They need to address ecological and social challenges—and also look at business opportunities. How to manage our natural resources better? How

to reduce and eliminate waste? How to pollute less? How to convert all these into profitable business opportunities? We need to find innovative solutions. At Wipro, we always believe that we must act responsibly—towards everything. We pioneered many initiatives in energy and water conservation, more than a decade ago, even before they were made mandatory. Building on this, we dramatically scaled up the commitment and action on ecological sustainability throughout the company. This action has three dimensions—the first is to make it and its operations ecologically sustainable, the second to help customers make their organisations ecologically sustainable and the third to work with a wider set of stakeholders to help in a social transformation towards a “green” society. We are making the company ecologically sustain-

I think it’s a long road for all of us, but we must walk this road. In my view, ecology is one of the defining issues for humanity and for the planet for the next few decades. able by reducing our carbon footprint. We have invested in businesses in IT for green, green IT, clean energy, water treatment and reuse solutions, and have added LEDs to our lighting business and green furniture to our furniture business. We think of these businesses as great opportunities for growth and a large vehicle to directly contribute towards an ecologically sustainable world. We are learning with each action of ours, and building on that learning. I think it’s a long road for all of us, but we must walk this road. In my view, ecology is one of the defining issues for humanity and for the planet for the next few decades. All of us must do our bit to become ecologically sustainable and to help civil society in this cause.

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i think

Facts & Trivia

ZODIAC SIGN: Pisces PAST EMPLOYER: American Express Bank LAST BOOK READ: Freakonomics by Steven Levitt and Stephen Dubner; and The Rise and Fall of the Third Reich by William Shirer FAVOURITE RESTAURANTS: Dakshin, Dum Pukht, Trattoria, Thakkar

RAJENDRA PRASAD

THE PRESIDENT AND CFO OF SRF LTD says global warming needs a global solution, at an individual level

THE COPENHAGEN SUMMIT ON climate change has placed global warming right at the top of a long list of environment-related issues. While one cannot underplay the fallout of climate change, the problem is far more complex to resolve than it appears. As individuals all of us are responsible for it, albeit in varying degrees. And our response to climate change, both individually and collectively, is crucial. We all know that the average global temperature is rising at an alarming rate due to increasing levels of greenhouse gases in our atmosphere. As a result, sea levels are rising and the weather is becoming unpredictable. Clearly, all of us are going to be affected irrespective of our social and economic status. And whether we like it or not, as individuals we are all responsible for the situation we are in today. Many factors have contributed to the situation coming to this pass. The most pronounced one is injudicious use of limited resources. Deforestation, excessive use of chemicals with longterm adverse environmental impact, contamination of permanent water 12

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reservoirs, land degradation and use of non-biodegradable materials, plundering of flora and fauna, unabated consumption of non-renewable resources and mindless industrial activities leading to global warming and depletion of the ozone layer that protects the earth are just a few examples of indiscriminate desecration of the environment we live in. Without doubt, mankind’s growing demands are becoming a greater burden on the earth. Simply put, our actions, and more importantly, our inactions have endangered our own lives. Our slogan must change from “Save Our Earth” to “Save Our Life”. Along with the culture of consumption comes the bane of wastefulness. The practice of re-using, repairing or recycling is passé. “Use and throw” is the norm in the modern world. There is no denying that the need for modern living standards has a direct conflict with limited inputs. More energy is required to support greater comforts at home and workplace and more raw materials are needed to support greater consumption. We need

to inculcate and promote the habit of making do with adequate or less. While we talk about renewable sources of energy, biodegradable material, natural and green products and processes, it would be fair to say that these only help in reducing the impact of the problem. To produce desired goods, clean technology should be preferred. Implicit in this is that clean technology is more expensive to develop and obtain. If it were cheaper it would have been used in the first place. Now, the rich nations need to part with cleaner technologies at a reasonable cost if the crisis is to be averted. Climate change requires a global solution at an individual level, in a concerted and coordinated manner. We need to be concerned about bringing our lifestyle to sustainable levels, applying clean and appropriate technologies, developing energyefficient alternatives, getting back to the habit of re-cycling and repairing resources and reducing wastage. We must continuously evaluate the impact of human activities on the environment.

i think JANUARY 2010

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THE

Green REVOLUTION It’s all about seizing your company’s climate-change opportunity BENNETT VOYLES

BINESH SHRIDHARAN

CLIMATE CHANGE IS LIKE THE INTERNET; IT ARRIVES ONE DAY AND GETS BIGGER EVERY YEAR, IT NEVER GOES AWAY AND YOU HAVE TO LEARN TO MAKE MONEY FROM IT. —PETER DICKINSON, CEO, CARBON DISCLOSURE PROJECT

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CLIMATE-CHANGE DISCUSSIONS once had a sort of religious quality about them. Al Gore, R. K. Pachauri, or another environmental prophet would warn people and businesses to mend their wicked ways. Afterwards, executives and politicians would nod their heads repentantly. And then? Mostly sooty business as usual. Now, the attitude seems to be changing. After many years in which companies’ environmental stance was a bit like St. Augustine’s famous prayer to “give me chastity … but not yet,” business is starting to take climate change seriously. Executives at many companies in India and around the world have begun to modify their view for three reasons. First, many are

THE NEXT GREEN REVOLUTION | COVER STORY

PHOTOS.COM

now genuinely concerned about the prospect of more extreme weather. In India in particular, the forecast is not good. Second, whatever their beliefs, they understand that sooner or later, society’s concerns translate into a regulatory and marketing challenge. Finally—and perhaps most of all—they’ve started to see climate change as a business opportunity. “We think it’s going to grow into a pretty large business, not in a year or two but in five or 10 years,” says Suresh

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COVER STORY | THE NEXT GREEN REVOLUTION

Senapaty, CFO of Wipro Ltd, which is trying to parlay the work it has done in reducing its own carbon use into new lines of systems integration that gives companies advice on the best ways to reduce their environmental impact, both in and out of IT. Nor is the Bangalore executive alone. In a survey conducted by the Carbon Disclosure Project of 44 large Indian companies that responded to the group’s questionnaire in 2009, 84% see an opportunity in regulation and 79% see other kinds of opportunities in climate change. Of course, for most companies, it’s probably not going to feel much like an opportunity at first. Coping with climate change will add cost, red tape, and bother. For the CFO, climate change will look a lot like a permanent tax hike, or maybe more to the point, interest on a debt. That very pressure, however, seems likely to some experts to make climate-change manage-

“I BELIEVE THE WORLD IS GOING IN THAT DIRECTION (OF TRIPLE BOTTOM LINE ANNUAL FINANCIAL REPORTS) AND IT’S ONLY A MATTER OF WHEN, NOT IF, SOMETHING LIKE THIS WILL BECOME MANDATORY.” —VISHESH CHANDIOK, NATIONAL MANAGING PARTNER OF GRANT THORNTON IN INDIA

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ment a successor to the Lean Supply and Quality movements—a new way to squeeze more waste out of the system. Although this might sound like a job for the supply-chain guys, even now the top brass of many companies are playing an active role in managing climatechange issues. In a 2007 survey in India by the Carbon Disclosure Project, only 39% of the companies that responded had executive committees on climate change headed by the CEO or the managing director. In 2008, that figure rose to 62%, and in 2009 74%. “Management is saying, this is an important issue. We need to get involved in it,” says Sue Howells, head of global operations for the London-based group, which is encouraging major companies worldwide to voluntarily disclose their greenhouse gas emissions. Nor will the CFO be able to dodge those meetings for long. Climate change spans many areas where the CFO is an important player, including investor relations, project finance and financial modeling. It’s not an entirely comfortable extension of the job description—many of the carbon metrics are non-financial, though they have financial implications—but to the extent that a lot of climate change-related work involves purchasing, regulation, and project finance, it’s hard to imagine how it could be tackled without finance playing a major role. Senapaty, for one, sees himself playing a multifaceted role at Wipro with respect to climate

CFO

GREEN SPECIAL change, as a “controller, enabler, advocate and evangelist”. If you’re not ready for this—and most companies aren’t—where should you begin? Here are three questions to ask that should help you and your company get up to speed:

1. WHAT’S OUR FOSSILFUEL BETA? One of the difficulties of managing a company for sustainability has always been the amount of science involved. Measuring the amount of greenhouse gases your company produces, let alone the gases your suppliers produce, can be quite complex. For businesses, this creates both a practical and an organisational challenge. If you own smokestacks, it’s a fairly straightforward task, but for other kinds of businesses with long value chains, it’s not so simple. How do you know if you have any greenhouse gases to reduce? Anant Sundaram, a finance professor at the Tuck School of Business at Dartmouth College in the U.S., thinks he has found a partial solution: fossil-fuel beta. Sundaram’s theory is that embedded within each stock price is information about the company’s energy use. His metric measures how much a company’s stock price changes with every 1% change in the price of fossil fuels—“an objective, concrete, simple handle on whether or how fossil fuel price changes impact your stock price”, he says. Sundaram’s metric discounts for standard market movements, then tracks the stock’s behaviour against the price of crude. For example, an upscale American retailer, Nordstrom Inc, has a fossil-fuel beta of -49, meaning that when the price of fuel rises 1%, the Seattle retailer sees a nearly 5% drop in stock value. Meanwhile, UPS Inc has a 0 beta, perhaps because 30-40% of its fleet has converted from petrol to cleaner-burning natural gas.

THE NEXT GREEN REVOLUTION | COVER STORY

“CLIMATE CHANGE IS GOING TO IMPACT ORGANISATIONS FROM A VARIETY OF DIRECTIONS … COMPANIES THAT ARE TRYING TO DO LONGRANGE PLANNING WITH CLIMATE CHANGE IN MIND NEED TO THINK ABOUT SOME UNFAMILIAR AND HARD-TOQUANTIFY VARIABLES.”

While the metric works well for oilconsuming companies, Sundaram is the first to acknowledge its limitations. For example, energy-producing companies can’t use it because renewableenergy and fossil-fuel companies tend to perform better as the price of oil rises. Companies that hedge their fuel costs also may find it less than useful as well, if their goal is to reduce their overall consumption rather than just their risk of energy-price volatility.

—ROBERT MUIR-WOOD, CHIEF RESEARCH OFFICER AT RISK MANAGEMENT SOLUTIONS IN LONDON

2. WHAT’S OUR CARBON FOOTPRINT? Assuming the news from the beta exercise is bad, the next step is to pinpoint the origin of those risks. Auditing how much carbon a company emits is a very different task compared with conventional financial audits. Many organisations now provide such assessments, which are being used as both a management tool to improve environmental performance and as a way to establish green credentials. The latter shouldn’t be dismissed as eyewash: many experts believe

green performance will soon become an important way to make a company more attractive to investors and potential partners, and indeed officers at the Carbon Disclosure Project say that companies that disclose their carbon emissions with the group tend to outperform companies that don’t. Many consulting shops now offer a variety of environmental audit services, but you may also be able to get started by working with two nonprofits that know a lot about collecting this kind of information: the Carbon Disclosure

Project, an independent not-for-profit organisation that maintains a database of corporate climate change information; and the India GHG Inventory Programme, a detailed emissions benchmarking programme sponsored by the U.S. Environmental Protection Agency, the Confederation of Indian Industry (CII), and the World Resources Institute, a Washington-based think-tank that follows climate developments. Private resources are also available. For example, Trucost, a private British provider of global environmental data,

The Dirty Truth UNLESS INDIA MAKES some substantial improvements in its energy efficiency, McKinsey & Co.

estimates that greenhouse-gas emissions could rise from 1.6 billion tonnes of carbon dioxide to 6.5 billion tonnes by 2030. Power demand could rise five-fold, McKinsey projects, as the country’s population rises to 1.5 billion and total building stock grows from 8 billion square metres to 41 billion square metres. If this happens, it could have enormous consequences to the country, both in terms of GDP and the human toll. A recent report by Allianz, the insurance giant, for example, forecasts that over the next 40 years in India, the average number of drought years will rise from two to four per decade. A joint study by Swiss Re and McKinsey of climate trends in Maharashtra concluded that annual expected losses in that state alone could amount to as much as $570 million. But the study also concluded that 47% of the damages could be avoided through better planning and 34% mitigated with insurance, leaving 19% that can’t be avoided or somehow insured against. It won’t be cheap—McKinsey analysts estimate that keeping the carbon dioxide from rising as far as 6.5 billion tonnes will require an annual investment of roughly $24 billion between now and 2030, even allowing for some technical advances. However, the report argues that abatement could also spur innovation and open up new business opportunities.

TOTAL POWER DEMAND TERAWATT HOURS (TWh) Power grid

3,870 420

Captive

1,870 200

70 700 20 350 330 1990

3,450

1,670

630 2005

2020

2030

Source McKinsey

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maintains extensive greenhouse gas data on 4500 public companies, which company executives estimate cover 85-90% of the world’s corporate market cap. Using public sources as well as interviews, Trucost can identify as many as 724 different pollutants. Howells, of the Carbon Disclosure Project, says that participating companies often find that simply working to gather the data can be a helpful exercise. “When a questionnaire hits a CEO’s desk, it’s often the first time they’ve thought about climate change as a business issue,” she says. “Many companies don’t have data. In order to report, they have to spend a lot of time going around the company collecting emissions data.” Such reporting is voluntary, but some consultants argue it’s better to volunteer to start making such disclosures now, such as carbon disclosures or “triple bottom line” annual reports, rather than wait until they become compulsory— an event some believe is not far away. “I believe the world is going in that direction and it’s only a matter of when, not if, something like this will become mandatory,” says Vishesh Chandiok, national managing partner of Grant Thornton in India. Indeed, the writing does seem to be on the wall, at least in India. Already, the Corporate Affairs Ministry has asked the Institute of Cost and Works Accountants of India (ICWAI) to prepare guidelines on the costs incurred in reducing pollution, re-planting forests or restoring mined areas, a first step toward a mandated standard for companies to account for the costs of their climate-change-mitigation activities.

3. HOW CAN WE REDUCE OUR ENVIRONMENTAL LIABILITIES? Once the exposure is identified, the next step is to decide how to reduce it. For the CFO, climate experts say, the best way is to think of carbon as an enormous off-balance-sheet liability—one 18

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“THE BOTTOM LINE IS, IN A WORLD IN WHICH THERE IS A PRICE ON CARBON, COMPANIES IN COUNTRIES LIKE INDIA AND CHINA ARE GOING TO BE MASSIVELY EXPOSED.” —ANANT SUNDARAM, A FINANCE PROFESSOR AT THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH COLLEGE IN THE US

that is closer to coming due every year. If CO2 were $20 per tonne, the S&P 500 could owe the U.S. government as much as $80 billion, Sundaram says, according to Trucost estimates. Adjusted for scale, Indian companies’ costs could be even higher per company. The US emits about half a tonne of greenhouse gases for every $1000 of GDP produced, while the world averages about 1 tonne to $1000. For India, the number is more like 2.5, while China produces 3-3.5 tonnes, according to Sundaram. “The bottom line is, in a world in which

there is a price on carbon, companies in countries like India and China are going to be massively exposed,” he says. The good news is that improvements can be much more easily and cheaply made in India than in more developed economies. “There’s a lot of low-hanging fruit in India,” Sundaram says. Companies able to make some of these improvements should be wellpositioned to make real gains against the competition, both in greater efficiencies and in payments from cap-

THE NEXT GREEN REVOLUTION | COVER STORY

and-trade programmes on emissions and energy. Many Indian companies are expected to profit from national and international schemes in which they sell unneeded rights to emit carbon to companies that need those permits. For example, Tata Motors has already invested in a 20.8 megawatt wind farm in 1999-2000, for which it subsequently received 1.67 lakh in Carbon Emission Reduction units (CERs) under the United Nations Framework Convention on Climate Change for its performance from 2001 to 2007. The company later auctioned these coupons for Rs 14.45 crore in the financial year 2007-08. The Indian Government has a new plan for an energy cap-and-trade system that will create a cash incentive for energy frugality. Under the proposal, agreed to in principle by Prime Minister Manmohan Singh last August, companies that exceed the benchmark for their sector will have to pay for the privilege of that energy use by buying certificates from those who used less energy because of energy-efficient operations. Not all these cap-and-trade programmes are active yet, but Sundaram says smart companies are already acting and then having their work documented. “They report these things to places like the Carbon Disclosure Project so that four years from now, in a world in which there is a price on carbon, they can say ‘look, I want some grandfathered credit for all this stuff that I’ve already done’.”

GREENER PASTURES Of course, reducing fossil-fuel exposure is just the first stage of handling climate risk. The fact that your company shares a planet with a few other people creates all kinds of knock-on effects in terms of changing product demand, customer-cost pressures and severe weather logistics. “Climate change is going to impact organisations from a variety of directions,” warns Robert Muir-Wood, chief

research officer at Risk Management Solutions in London. He says companies trying to do long-range planning with climate change in mind need to think about some unfamiliar and hardto-quantify variables. “It’s quite complicated because it may not just be the sector they’re in but actually other sectors which are around them or which potentially affect their competitors in different ways,” he says. Not only are the problems complex, but the time of particular events also can’t be predicted with any specificity— a difficult combination for businesses that must manage quarter by quarter. “It’s possible to predict things like rainfall and temperature in the future, but it’s not easy to predict events themselves,” Muir-Wood says.

energy-efficient buildings, or in green consulting and operations management. Wipro, for example, is trying to not only make internal processes greener but also to develop green services as a business line, leveraging its expertise in IT management and systems consulting into green-focused advice on integrating energy sources, building control systems and data centres. Already, demand for green advice is growing in the West. “Companies are spending huge amounts of money on consultants advising stuff on this right now,” says Muir-Wood. “...I don’t think any company in Britain of any size will not have had actually quite a lot going on internally.” Senapaty is optimistic about Wipro and India getting a share of that busi-

CLIMATE CHANGE SPANS MANY AREAS WHERE THE CFO IS AN IMPORTANT PLAYER, INCLUDING INVESTOR RELATIONS, PROJECT FINANCE AND FINANCIAL MODELING Climate change can have an impact on a wide variety of decisions, everything from how to respond to competitors to whether it’s a good idea or not to build a warehouse near the port if storm surges are expected to be more frequent, according to Muir-Wood. Theoretically, climate change could even affect a company’s marketing agenda. A tractor maker might want to boost distribution in Russia and Canada, which are forecast to become more temperate in the coming years. A sweets maker could plan on selling more ice cream and less candy, for example. Beyond taking advantage of government-driven activity such as cap-andtrade programmes, some leading Indian companies reportedly see their biggest possibilities ahead in green services— either in providing services with a greener tinge, such as call centres running in

ness, and sees the growth of green services as practically inevitable. “You can argue over whether it will take off next year or next year or next year, but in a 10-year time frame, 20-year time frame, no question,” he says. “No question”—Senapaty’s certainty isn’t unique. Increasingly, as the Carbon Disclosure’s survey suggests, top executives at large Indian corporations who have thought seriously about sustainability have reached a similar conclusion. In the end, as Senapaty understands, the choice of whether to go green or not isn’t much of a choice. It’s more like an offer you can’t refuse. On one hand there’s the likelihood of cost savings and the possibility of a BPO-sized business opportunity. On the other, well, what exactly is the RoI of drought, bad air, and a rising sea level?

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CFO PROFILE SURESH SENAPATY, CFO, WIPRO LTD

Green EVANGELIST THE

The down-to-earth CFO of Wipro talks about childhood, work and green business ULLEKH NP

MANY YEARS AGO, AFTER HE COMPLETED CLASS I, SURESH SENAPATY DROPPED OUT OF Stuart School in Orissa’s capital Bhubaneswar. Was he homesick?

Maybe yes. Maybe no, he isn’t sure. Senapaty has some vague memories. That’s all. “Ours was a business family and our idea of education early on meant just learning to calculate. That was considered enough education,” remembers Senapaty’s older brother Lalmohan. Senapaty was then put under a home tutor for a few years until Lalmohan goaded him into getting back to formal schooling in Class VI. Had his brother not been persuasive enough, Senapaty says he would have joined rural India’s thousands of other school dropouts. The technical school he attended afterwards had a great reputation for producing future engineers. Like many of his classmates at that school in the bustling little town of Aska, Senapaty, too, would have become an engineer without com20

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ZODIAC SIGN: Scorpio WIFE: Neeraja, a homemaker LOVES: Beaches, hill stations FAVOURITE CUISINE: Japanese, Chinese FAVOURITE MOVIES: Indian FAVOURITE AUTHORS: Jack Welch, Alan Greenspan MUSIC: Old Hindi songs ACTIVITIES HE LIKES: Badminton, swimming FAVOURITE ACTORS: Madhuri Dikshit, Akshay Kumar

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RADHAKRISHNA

Facts & Trivia

CFO

cfo profile

GREEN SPECIAL

Senapaty has accomplished significant milestones for Wipro, including the merger of firms such as Wipro Infotech and Wipro Systems with Wipro Ltd and the NYSE listing of the company.

plaining much because his parents wanted him to follow in the footsteps of Lalmohan, the first engineering graduate in the family. His dream was to be an engineer and then join the defence forces. Had he done that, he would probably have grown up to become what his surname stands for, a commander! In fact, he went to school much earlier than other children—he was in Class I even before he was four—and private schooling helped him save a few years en route to his enviable rise to become the youngest member of Wipro Ltd’s Corporate Executive Council in 1994 at the age of 37. Being an early bird was a blessing for him, but only in disguise. As it happened, when he finished school, he hadn’t still attained the threshold age to apply for admission to the engineering college. It was then that he opted to study commerce and accounting. “That made all the difference,” says Lalmohan, fondly thinking of his younger brother whom he says was “a bit casual about things back then and needed to be given direction in life”. “He is now the pride of our family,” adds Lalmohan. “He is the fifth of us six siblings … besides being the first one from the family to stay in a boarding school he is the first one to leave our home state Orissa to pursue studies elsewhere, in Mumbai.” That’s the story of success: the story of a boy from a small town along the Chilika Lake who is now the nononsense chief financial officer of India’s third-largest software exporter, Wipro Ltd.

RISING EARLY TO THE OCCASION Being early is one of the attributes of Senapaty’s long-time employer as well: Wipro is one of the earliest players in India’s information technology sector; it is now the country’s third-largest outsourcing firm with $6 billion in revenues. It is one of the first companies in India to introduce employee stock options, as early as 1984, and, recently, one of the first organisations in the country to go green in a full-fledged way and see climate-change risk as a major opportunity. The company has come a long 22

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way indeed, from a tiny cooking oil producer current chairman Azim Premji inherited from his father in 1968 to an IT services giant it is now—and it expects its green businesses to contribute hugely to its revenues in a few years. Wipro, in fact, is an acronym of West Indian Vegetable Products, the company founded by Premji’s father in the mid-1940s. Premji first repositioned the company in the mid-1970s as a consumer goods company and then diversified it into an IT company in the early 1980s. According to Senapaty, Wipro is early in tapping new business potential because its officials are used to closing down business and starting something new from scratch. “A new approach sinks in fast here.… I have learnt to close and shut businesses in a big way at Wipro,” notes Senapaty, who joined Wipro in 1982 as the chief financial officer of its consumer care business. “We are experienced at the top management level to face ups and downs.” Some twenty-seven winters later, the relatively young-yetveteran Senapaty says going green, a policy embraced by his company in a big way at a time when climate-change risks are immense, is a great opportunity. And what’s his latest role? “It is almost like that of a green evangelist.” “See it is a new theory, new story.… We don’t lose an opportunity whenever we meet cabinet ministers—of renewable energy, industry and finance, etc.—to say that adoption of GRI (Global Reporting Initiative) has to be made mandatory … that could make more people toe the green line … therefore, in that sense, there are several elements of evangelisation in my efforts,” says he. GRI framework is the most widely used sustainability reporting framework in the world. “Greening … that is where the future of our country lies and we SURESH SENAPATY

“We went for listing in the US with a view to attracting global talent, pursuing M&As and promoting Brand Wipro.”

UNCHARTED TERRITORY There is always skepticism or rather fear of untested waters in any organisation and when the proposal came up for entering the business process outsourcing segment in 2002, there was this question in Wipro: why should we be there? “We would like to take some pride in that … we did the research and then this question came up,” says Senapaty confidently. Wipro started its BPO services in 2002 after acquiring Spectramind. “After talking to our customers, we realised that we could achieve more offering integrated services, along with BPO, than just IT,” Senapaty says, adding that “after a quarter or so, everybody thought that was a masterstroke as far as we are concerned”. The BPO business has now become a very integrated part of the company, thanks to which Wipro is now on a strong footing, he says. He also dismissed the talk of the Philippines being a threat to Indian BPO companies. Well, Senapaty often gets his math right. He has already accomplished some significant milestones for Wipro, including the merger of various companies such as Wipro Infotech and Wipro Systems with Wipro Ltd and the New York Stock Exchange listing of Wipro in 2000, the second time the company accessed the capital market; the first was in 1946. Talking of US listing, he says the idea was simple: we should be a global business and therefore we should have a global brand. “We did it with the view to attracting the best talent, gaining currency for acquisitions and building a global brand called Wipro,” says Senapaty. “We have built a global brand and attracted the best talent though we haven’t used the currency for acquisitions much,” he notes, looking back. “Wipro, thanks to Premji, has always attracted the best people to work for him,” he adds matter-of-factly. And Senapaty says he has learnt a lot from most of them, but some men were more inspiring than others.

attitude, he would not lose out on an opportunity to remind me to dream big and be non-conventional.” At Wipro, former vice-chairman P.S. Pai was one of Senapaty’s earliest mentors. It was from him, Senapaty says, that he picked up the “drive to achieve growth”. “In fact, I learnt with him how to close down business and start business,” says Senapaty of Pai, who is currently the chairman of LifeCell, a company that is into stem cell banking, research and therapy. Former Wipro president Ashok Soota was another crucial influence in Senapaty’s life. “He always laid a lot of emphasis on relationship building, customer satisfaction and nurturing talent.” Soota is now chairman, MindTree. The fourth influence on Senapaty is billionaire-chairman Premji himself. “He has the charisma. He has the capacity to attract the brightest people in the world. Even more amazing is his quality to drive execution relentlessly while focusing on the big picture.” The styles of working of these men are different, but there’s something common to all of them, he says: they hate to lose.

GREEN SIGNALS FOR GROWTH Senapaty loves to help win. Notes Jessie Paul, former chief marketing officer of Wipro Technologies: “Senapaty is very helpful to everybody in the company with his rich experience.... He is highly knowledgeable and very hands-on.”

According to reports, the Bangalorebased software exporter expects its green businesses to bring one out of every four dollars of its revenues three years from now.

FOUR GOOD MEN Among his mentors, Senapty counts his brother Lalmohan as the first. “He was my staunchest critic and my biggest supporter. Even as he came down heavily on me for my casual

Adds KR Lakshminarayana, chief strategy and M&A officer of Wipro: “His ability to connect to handle breadth and depth at the same time is his greatest quality.” The hands-on Senapaty sees business in outsourcing and infrastructure to rise exponentially. And then, there’s this business of sustainability. Wipro expects its green business to bring one out of every four dollars of the company’s revenue three years from now. Senapaty is betting big on its water, eco energy and green infrastructure businesses. As CFO, Senapaty has so far managed the finances of a company that helped some of the world’s biggest corporations cut operational costs. He will now manage money in the same company that now wants to make money by helping those global giants save energy and cut carbon footprint. And it sounds like a winning game. “Look, there is no substitute for hard work,” declares Senapaty. “You have to prepare, prepare and prepare.”

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have to be torchbearers,” he adds. Wipro has already turned its campuses into test beds for “green” growth. According to reports, the company has cut water usage in its offices across India by almost two-thirds since 2003. It also uses harvested rainwater for cooling air-conditioning towers and a micro windmill to light bulbs across its Bangalore campus. There is, of course, unanimity within the organisation for pursuing sustainable growth, but that wasn’t always the case.

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GREEN SPECIAL

insight THE BUSINESS OPPORTUNITY IN WATER CONSERVATION For many companies, water efficiency is a long-term requirement for staying in business, a big commercial opportunity, or both.

BY GIULIO BOCCALETTI, MERLE GROBBEL, AND MARTIN R. STUCHTEY

n a world where demand for water is on the road to outstripping supply, many companies are struggling to find the water they need to run their businesses. In 2004, for instance, Pepsi Bottling and Coca-Cola closed down plants in India that local farmers and urban interests believed were competing with them for water. In 2007, a drought forced the US Tennessee Valley Authority to reduce its hydro-power generation by nearly a third. Some $300 million in power generation was lost. Businesses everywhere could face similar challenges during the next few years. A larger global population and growing economies are placing bigger demands on already-depleted water supplies. Agricultural runoff and other forms of pollution are exacerbating the scarcity of water that is clean enough for human and industrial use in some regions, and changes in climate may worsen the problem. Scarcity is raising prices and increasing the level of regulation and competition among stakeholders for access to water. Achieving that goal is an opportunity as well as a necessity. Many of these same companies are developing products and services that can help business customers raise their water productivity. In agriculture, improved irrigation technologies and plant-management techniques are yielding “more crops per drop”. New approaches now rolling out will help oil companies, mines, utilities, beverage companies, technology producers, and others use water more

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efficiently. Closing the gap between supply and demand by deploying water productivity improvements across regions and sectors around the world could cost, by our estimate, about $50 billion to $60 billion annually over the next two decades. Private-sector companies will account for about half of this spending, government for the rest. Making a business out of improving water efficiency won’t be easy. Successful providers will have to migrate from selling equipment and components to selling solutions aimed at helping business customers reduce their water and energy use. The providers will, therefore, have to develop new skills and capabilities, particularly in marketing and sales, to identify and capture the highervalue- added solutions that business-to-business markets need. They must also engage more actively in shaping the regulations that will define this market—standing on the sidelines is no longer an option. Nearly every sector will be affected, whether a company is improving its own water

insight

productivity or selling equipment and services to help other companies do so.

DOING MORE WITH LESS Many countries face a growing gap between the amount of water they can supply reliably to their economies and the amount they need. Assuming continued economic and population growth, by 2030 water supplies will satisfy only 60% of global demand (exhibit) and less than 50% in many developing regions where water supply is already under stress, including China, India, and South Africa. Closing the gap by increasing supply will be extremely difficult and expensive. More likely, governments will need to manage demand, either by raising the price of water or by capping the amount of it that users can draw. These moves will have a direct impact on local and multinational businesses. They need water—often in large quantities—for their processes, products, and operations. Their global assets reside in countries where rules governing water usage and prices will vary, along with access to water. Take Chile, for example—one of the world’s most important mining centers and also among the driest spots on Earth. Here the authorities allocate fresh-water rights among companies strictly, closely monitor their usage of water, and pressure them to use less of it; for example, the country’s third-largest copper mine, Xstrata’s Collahuasi operation, was asked to reduce its rate of water extraction to 300 litres a second by 2010, from 750 litres now. To make up the difference needed to remain in operation, the company has considered building a desalination plant or shipping in water to the mine. It is also deploying new technologies and processes, such as

The water gap The water gap: Case studies Case studies of three countries and one region show that there is no single water crisis—each area faces a unique set of problems.

using less water to separate waste rock (called tailings) from ores and recycling more of the water used in the process. Companies in several sectors are improving their water productivity. The Swedish pulp-and-paper producer SCA,1 for instance, aims to reduce its overall water consumption by 15% from 2005 to 2010. SCA tracks its performance through a resource-management system that collects and aggregates data on energy, water, transport, and raw material use, as well as waste and emission levels from both production sites and business divisions. The brewing conglomerate SABMiller launched a water footprint study to compare its total water usage, from crop to consumer, in different countries and has used the findings to target improvements throughout the value chain. By 2015, it hopes to use 25% less water per liter of beer produced. Several other big corporations, such as Ford Motor Company, Nestle, and

Making a business out of improving water efficiency won’t be easy ... the providers will have to develop new skills and capabilities.

P&G, have been reducing their water usage too. The first step is usually to study where their processes use water and how much of it. Often, these companies discover a few areas where they can make significant improvements for a small outlay. A mining company, for example, found that more than 30% of the expense associated with water came from potable water. By fixing leaks in a single pipeline leading to a mine, the company cut the cost of potable water by 5%. After examining the total costs associated with water usage, it discovered that 40% of them came from the energy needed to run pumps. Few companies, however, look beyond near-term water constraints, as important as they are, to a more comprehensive assessment of the longer-term business risks associated with water scarcity.

WHERE THE OPPORTUNITIES ARE Many solutions that will help companies use water more efficiently in their operations—from farms to semiconductor fabs, bottling plants to nuclear ones, steel mills to oil rigs—will be new products and services under development

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insight

GREEN SPECIAL today. Global industrial players, such as ABB, GE, and Siemens, already have large water businesses and continue to develop new products in this area for large industrial users and water utilities. IBM provides technologies to measure and track water efficiency efforts and to improve water treatment and irrigation. A few oil companies are thinking about getting into the water market by selling the pumping technology they’ve developed for their own operations. Roughly speaking, the broadest range of opportunities for new products and services falls into three areas: improving the productivity of water treatment and distribution, of water-intensive industrial and power processes, or of water usage in agriculture. These segments are evolving on different time lines and involve different sets of solutions, but a broad range of companies could be successful in any of these areas.

TREATMENT AND DISTRIBUTION Municipal or private water utilities and many large businesses spend hundreds of billions of dollars a year making water fit for human consumption and industrial activity and then transporting it, through pumps and pipes, from treatment plants to points of use. The costs include expenditures on new infrastructure, such as a new treatment plants—China and India alone are building hundreds of them to treat water and wastewater—and on operating and maintaining systems. Two-thirds of this spending occurs in developed countries, but much of the growth in new systems will take place in Asia and other developing regions over the next two decades. Trillions of dollars will be spent on technology, equipment, and services. Meeting this growth with existing technologies is a huge business in itself. In China alone, we estimate, the market for the current membrane technology used to clean wastewater will grow by more than 30% a year over the next two 26

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Innovation is the key In many European and US cities the same sewage systems collect residential and commercial wastewater, runoff rain-water, and melted snow. Singapore, by contrast, collects different gradations of discharged water separately and can redirect some of it to uses requiring lower levels of quality. Then it goes on to treatment plants for cleaning and reuse in other applications—a far more efficient approach. In Masdar City, a planned community under construction in Abu Dhabi, urban designers hope to recycle as much as 80% of the water the community will use. And new desalination

technologies are reducing the cost involved in desalinating water, as well as increasing its quality. As water needs grow in the developed and developing world alike, and regulations and water prices come to reflect the need to manage demand, new solutions could provide significant value to public and private buyers. Companies already active in this space have many opportunities to introduce new products, including devices that collect wastewater from sinks to reuse for flushing toilets, technology for collecting and reusing condensate from air-conditioning systems, more waterefficient appliances, and ultraviolet disinfection technology adapted for home use. Hong Kong’s water department has developed systems to use seawater in toilets and may soon use it to cool commercial buildings.

Agricultural companies are already looking for ways to design seeds that require less water ... farmers will not have to over-water their fields. decades. Introducing new technologies and services will eventually be an even bigger opportunity, both for existing players and new entrants. In many European and US cities, for instance, the same sewage systems collect residential and commercial wastewater, runoff rain-water, and melted snow. Singapore, by contrast, collects different gradations of discharged water separately and can redirect some of it to uses requiring lower levels of quality. Then it goes on to treatment plants for cleaning and reuse in other applications—a far more efficient approach. In Masdar City, a planned community under construction in Abu Dhabi, urban designers hope to recycle as much as 80% of the water the community will use. And new desalination technologies are reducing the cost (and the extensive energy) involved in desalinating water,

as well as increasing its quality. As water needs grow in the developed and developing world alike, and regulations and water prices come to reflect the need to manage demand, new solutions could provide significant value to public and private buyers. Companies already active in this space have many opportunities to introduce new products, including devices that collect wastewater from sinks to reuse for flushing toilets, technology for collecting and reusing condensate from air-conditioning systems, more water-efficient appliances, and ultraviolet disinfection technology adapted for home use. Hong Kong’s water department has developed systems to use seawater in toilets and may soon use it to cool commercial buildings. There are also opportunities for innovators. On the drawing board today are ideas for recycling desalinated

EXHIBIT: RUNNING ON EMPTY

insight

Global water supply (154 basins/regions)

Supply

Compound annual growth rate, 2005-2030=2%

Factoring in basins with deficits… 6,906 843

- 2,765

…And those with a surplus…

…results in a projected 40% gap in 2030

1,531 Homes

4,208 512

Industry

693

Agriculture

+81 4,531

4,222 688

Groundwater

3,534

Surface water

3,003

20051

2030 (Projected2)

Existing reliable Supply in 20303

1. based on inputs from International Food Policy Research Institute (IFPRI) 2. Based on frozen-technology scenario and no increase in water efficiency after 2010; figures do no sum to total, because of rounding. 3. Supply at 90% reliability, including infrastructure investments scheduled and funded through 2010; supply in 2005 is 4,081 billion cubic meters per year, projected improvements in technology and infrastructure brings 2030 total to 4,866 billion cubic meters per year; net of environmental requirements. SOURCE: IFPRI; MCKINSEY ANALYSIS

brines, low-energy technology that separates industrial waste into irrigationquality water and valuable chemical byproducts, and ways to condense fog into usable water.

INDUSTRIAL EFFICIENCY Power and industrial companies use significant amounts of water in production processes and as a coolant—16% of global demand today, rising to 22% by 2030, with about 40% of this growth in China. Moving water at these volumes and using it in some processes (such as steel making or power production) requires a great deal of energy, so using less water to do more also means

using less energy. One bottling company, for example, is starting to deploy a new technology, called radical water, to clean bottles.2 The traditional process requires about five hours of cleaning; with the new one, the company can clean the same number of bottles in just 30 minutes, using significantly less water and energy. Other technologies that can help businesses to reduce their water usage and energy costs include thickening paste tailings3 in mines, closed-loop systems in pulp and paper plants, and flow control and automatic shut-off valves in textile production. These solutions sometimes require trade-offs, however. Dry or closed-loop cooling systems in power

Hong Kong’s water department has developed systems to use seawater in toilets and may soon use it to cool commercial buildings.

plants, for instance, use up to 97% less water but are also less efficient. (In South Africa, Eskom uses dry-cooling technology because of the looming prospect of water shortages, but in another climate the efficiency trade-offs may not make sense.) Emerging new technologies also help companies in industries such as power to use water more efficiently in energy-intensive processes. The market for these solutions will grow dramatically in just a few years as regulations and increased water prices make using large amounts of water more costly. Finally, many manufacturers don’t have the information they need to manage the water that flows through their processes—information that is critical for improving productivity. .

AGRICULTURE Farming accounts for 71% of global water withdrawals, a proportion that we project will decline only slightly, to

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GREEN SPECIAL 65% by 2030. Water scarcity is tied both to the growing and the trading of food. India, for instance, now has just half of the water it will need in 2030, and agriculture will account for about half of the growth in water demand over the next two decades. It will account for about half of all water use in China by 2030 and for about a third in Brazil—and neither country will have enough water for all its needs in 20 years. Finding ways to use water more efficiently in agriculture is critical. Agricultural companies are already looking for ways to design seeds and fertilisers that require less water, and better drip irrigation technologies will keep farmers from over-watering their fields. Many other sectors can provide valuable solutions under the right economic conditions. A large industrial company, for instance, could provide farming communities with pumps that it now sells to water utilities, broadening its customer base while improving efficiency in agriculture. IT solutions can help as well. Even raising the water productivity of

productivity investments, especially when the public sector can’t. The investment can be attractive for lenders, but they will have to know where and how to play. In India, for instance, some drip irrigation projects could help farmers reduce the cost of certain inputs (such as fertiliser) by up to 50%, depending upon the crop. Investors could capture a share of this value either as lenders or as equity holders in companies active in the drip irrigation value chain. China needs about $1.8 billion a year in capital to reduce leakage in municipal water systems. With a 22% rate of return, these investments could be an attractive solution for municipal utilities and their lenders alike.

WINNING IN WATER Water is a large market, but as it grows, the rules for winning will change. Buyers of water-related goods and services, ranging across the public and private sectors, have very different needs. For many years, water has been largely a

What will separate winners from losers is regulation. Many water users are already actively clarifying critical positions with regulators. farms in rainy locales is a critical piece of the puzzle. Maintaining rain-fed land and improving its productivity are particularly important, since to the extent that agriculture uses water from rain, it is unnecessary to extract water for irrigation. In India, this source provides 17 percent of the total potential for agriculture to close the gap between demand and supply. The opportunities include a better fertiliser balance in fields, integrated pest management, and improved drainage systems. Finally, financial institutions and investors can benefit from efforts to boost water productivity in treatment, efficiency, and agriculture. Banks will need to provide capital for many water 28

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“pull” market: utilities and businesses request bids on new equipment, and the companies making it respond. As the market grows and novel technologies become available, profitable new opportunities will emerge. Today, by meeting only the minimum standards of customers, an equipment provider has little opportunity to prove that it can give them better service, with lower costs and lower levels of risk over a life cycle. New technologies will change that. Providers will also need to engage more actively with regulators, which over the next five years are going to design water-management policies that will determine which new technologies succeed or fail. What’s more, capital

costs for many projects are so high that purchases of new technologies often depend on a public buyer’s ability to put together complicated deals for capital financing. Tomorrow’s winners will have to tackle these issues.

DEVELOPING A SALES AND MARKETING APPROACH Even large industrial players in the water market have found it difficult to grow in this sector. Their sales efforts, reflecting the diversity of customer segments, suffer from fragmentation across different business units. Publicsector buyers often have slow, exacting procurement processes. Corporate buyers of new water facilities often want not just components but also integrated solutions for managing water in production processes—requiring significant levels of niche-sector expertise from sellers. Highly fragmented agricultural buyers favor low-cost solutions, while desalination players are few in number and put a premium on technological innovation. Meeting these different needs requires a variety of approaches. One industrial company, recognising the opportunity to grow along with the water market, is trying to change its approach: it has created a special initiative in which sales and marketing employees across sector-based business units identify and target new opportunities. The initiative reports directly to a top executive, and team members have incentives to increase sales in water markets rather than just their respective sector-focused businesses. Over time, the company believes, a focused sales force will find new openings for highervalue services and integrated solutions. What will shape the sector’s economics, separating winners from losers, is regulation. Many water users are >>For more articles on this topic, see www.cfo-india.in

already actively clarifying critical positions with regulators. In a world where regulators want to reduce demand for it by pricing it higher or establishing caps on its use, these utilities will need new models and a reasonable way to transition from old ones. In the United Kingdom, where water utilities have mostly been privatised, their executives are helping leaders of Ofwat, the UK Water Services Regulation Authority, to understand the nature of competition in the sector, the impact of demand management and pricing issues, and other matters that will shape the water market in coming decades. Similarly, some mining companies are working with regulators to determine the economic impact of the use of water and the options for consuming it more efficiently.

Technology providers are starting to develop products that can help most companies improve the way they track their water usage. Sellers of water products and services too must participate in these debates, as some large industrial companies in the water space already do. They recognise that if regulators in a region favour water reuse as a strategy for conservation, this preference will tilt the market odds in favour of companies that offer those technologies. The public-affairs units of some such companies are trying to understand how they could engage in conversations with regulators in a given region about new regulatory strategies. Inescapably, water will become a strategic factor for companies in most sectors. All businesses will need to conserve, and many will make a market in conservation. Tomorrowâ&#x20AC;&#x2122;s leaders in water productivity are getting into position today. ABOUT THE AUTHORS Giulio Boccaletti is an associate principal in McKinseyâ&#x20AC;&#x2122;s London office, Merle Grobbel is a consultant in the Cologne office, and Martin Stuchtey is a principal in the Munich office. 1. Svenska Cellulosa Aktiebolaget 2. Radical water, or electrochemical-activation (ECA) technology, to use its scientific name, creates unique properties in water molecules, resulting in an extremely potent yet environmentally friendly biocide. Trials and considerable R&D have proved that ECA solutions are efficacious against numerous bacteria (including MRSA), viruses, fungi (including their spores), yeasts, and many waterborne protozoa. ECA technology is particularly effective in the removal and ongoing control of biofilm, which, left unchecked, is most often responsible for the continuous contamination of the processing environment.

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3. A way to thicken tailings and any remaining process water. By 2030, this technology could save as much as 4 percent of the projected gap between water supply and demand in South Africa, or 125 million cubic meters annually. It offers savings of approximately $0.60 per cubic meter of water, with payback periods of one to two years. This article is first published in The McKinsey Quarterly 2009 Number 4 and is also available on the McKinsey Quarterly website, www.mckinseyquarterly.com. Copyright ÂŠ 2009 McKinsey & Company. All rights reserved. Reprinted by permission.

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inpractice

Green spaces HOW GREEN IS YOUR OFFICE?

Kamal Meattle explains how green buildings can help India achieve its carbon emission targets

PHOTOS.COM

nergy saved is worth 1.3 times or more than energy generated as we have to provide for transmission and line losses. If energy-efficient techniques are applied to at least 10% of the buildings constructed in Indian cities every year, India can expect enough savings in power to light 20 million rural households. Buildings, on an average, consume 40% of the world’s energy and the figure is about 30% in India and more than 60% in the US. Therefore, it is important to develop and use green and clean technologies in constructing and maintaining buildings because it not only helps cut costs but also mitigates climatechange risks. The concept of “green buildings” is slowly gaining in popularity in India and elsewhere in the world —they offer benefits that conventional buildings do not. Such benefits include energy and water savings, reduced wastage, improved environmental quality, greater employee productivity, reduced employee health expense and lower operations and maintenance costs.

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Today, we have even started talking of net zero energy, net positive energy and zero carbon buildings. True, buildings that are self-sustaining and carbon neutral are becoming a reality and there is a huge potential in the construction industry to tap this vast pool of innovation available to us. There is a huge potential in HVAC (heating, ventilating and air-conditioning) and AHU (air-handling unit) designs, especially in warm and humid weather conditions—like in India where energy recovery is very crucial—given that HVAC consumes 60% of the electricity in any given air-conditioned building and about 40% in a certified green building; LEED (Leadership in Energy and Environmental Design), ASHRAE (The American Society of Heating, Refrigerating and Air-Conditioning

Engineers), IGBC (Indian Green Building Council) and ISHRAE (Indian Society of Heating, Refrigerating and Air Conditioning Engineers) are playing leadership roles, offering a suite of standards in environmentally sustainable construction to a large audience in India and around the world. If we are to achieve the national goal of reducing carbon dioxide emissions by 25% by 2020, we can easily look to the 78% of India that is yet to be built, and make sure that the new buildings are all energy-efficient and green certified, IGBC or TERI GRIHA and BEE Energy star-rated. IGBC green building-registered projects is 322 million sq. ft at present and this is very little compared with the actual potential. Water, energy and waste management together with indoor air quality are very important verticals in any building, and we need to stress on health and quality of air indoors much more than we have done in the past. Energy consumes a substantial cost of building operations which can be reduced through efficient measures across the spectrum—in pumps, electric motors,

The concept of “green buildings” is slowly gaining in popularity ... they offer benefits that conventional buildings do not. automobiles, lighting, air-conditioning, production of cement, steel, etc. Also, we should outlaw conventional lamps and encourage CFLs (by creating a recycling plant and offering buyback opportunity to consumers for used CFLs) and allow the sale of only energy-star air-conditioners, refrigerators, electric motors, transformers, etc. We should charge a very high excise duty on energy-inefficient products and zero duty on energy-efficient ones. Besides, we must use solarpowered water heating in buildings. There is also a need to encourage lifestyle changes such as maintaining temperature in offices between 24 and 25 degrees Celsius, and doing away with wearing neck-ties and jackets in offices, in summer. Again, let the colour of green be white: encourage white-colour roofs and whitecolour vehicles, as they reflect light and consequently prevents it from turning into heat. THE AUTHOR IS CHIEF EXECUTIVE OFFICER, PAHARPUR BUSINESS CENTRE & SOFTWARE TECHNOLOGY INCUBATOR PARK

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inpractice

business performance MEASURING THE NEW ‘TRIPLE’ BOTTOM LINE: PEOPLE, PROFITS AND THE PLANET

With a growing focus on “green” initiatives, it’s a good time for CFOs to expand the scope of their responsibilities.

PHOTOS.COM

ver the past century, freemarket capitalism has done much to raise the economic prosperity of citizens in developed nations. Now, capitalism appears to be accepting an advanced mission—to help and possibly save the planet. Indeed, the focus on corporate social responsibility (CSR) and environmental management is no longer just an afterthought in an annual report or a public relations message. Terms like “sustainability” and “going green” have become fixtures in the business media. These terms embrace environmental and climate change responsibility, as well as corporate social interests in consumer safety, health and poverty reduction. And, sustainability is a way of thinking and acting when making decisions, not just a reaction after wrong decisions have been made. At a minimum, the CSR movement will involve external reporting that falls within the normal role of the chief financial officer. Through a series of questions and answers, the following attempts to discover how CFOs might be affected.

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BY GARY COKINS

HOW DO GREEN MOVEMENTS AFFECT A CFO’S RESPONSIBILITIES? The issues of oil, greenhouse gas emissions, global warming and poverty affect every organisation’s social and environmental performance, as well as its financial health. This rather recent occurrence has led to variations of the term “triple” bottom line reporting to encompass profit, people and planet. The CFO’s organisation traditionally has been responsible for collecting, validating and reporting data as information. The sustainability and green movement will extend this fundamental role to non-financial and non-operational information as the business community redefines the term “resource.” For example, the economic dimension of sustainability deals with the organisation’s impact on both economic conditions for its stakeholders

WHAT KEY ISSUES AND CHALLENGES FACE THE CFO’S ORGANISATION? A key challenge will be to balance new and unfamiliar compliance reporting activities while assisting the organisation in making sound decisions regarding improvement efforts. With accounting, CFOs balance external financial reporting for investors and regulatory stakeholders (mainly for economic valuation) with internal managerial accounting that is valuable to the organisation for internal decision-making. If CFOs focus their energy on compliance reporting, then managers and employees alike are denied the managerial information needed to improve the organisation’s performance. Too much emphasis on compliance reporting can also have a negative impact on social and environmental reporting efforts. As a result, only minimal contributions are made toward finding ways for management to reduce the organisation’s carbon footprint. Therefore, weighting the indicators that affect the triple bottom line reporting will become an important issue when optimising organisational performance in the context of sustainability. In short, CFOs will need to encourage their organisations to formulate sustainability and green strategies at the same time they are supporting enterprise performance management initiatives. There is an emerging connection between adopting sustainability and green practices and successful, longterm economic growth.

WHAT DO SUSTAINABILITY AND GREENING PORTEND FOR THE FUTURE ROLE OF THE CFO? The CFO role has evolved from history reporter to strategic adviser; finance chiefs have become valuable members of the executive team. The sustainability and green movements provide an opportunity for the CFO’s organisation to focus on more than just reporting; it can also provide the analysis needed to identify, in economic terms, how to better manage the organisation’s consumption of natural resources, such as carbon dioxide and power. Many organisations have little experience with such analysis. CFOs are now gaining competencies with performance measurement scorecards and operational dashboards. They are recognising that leading indicators measured during a time period have causal and correlated relationships with lagging indicators, such as the financial results, reported at the end of a time period. Environmental reporting will result in the emergence of CSR and green scorecards, including measurements of key success

bon footprint calculations. A challenge for the finance chiefs will be to shift their thinking from debit and credit issues to modeling. For example, activity-based costing (ABC) is widely accepted as consistent with the cause-andeffect accounting principle to transform resource expense spending into calculated costs of outputs, such as a product cost, that consume resources. Costing is basically modeling. Advanced organisations have already demonstrated that their ABC modeling software can substitute carbon dioxide equivalents for money and quantify how much and where their energy inputs convert to outputs, such as buildings or products. Carbon footprint modeling provides organisations with visibility and transparency for the carbon footprint quantities of their products and services back to the sources. Other CSR methods include lifecycle assessment and design for environment, used for performance and process evaluation. CFOs will need to adopt these types of progressive methods, or else their managers and teams will have to guess where the best trade-offs lie.

The challenge will be to balance new and unfamiliar compliance reporting activities while assisting a company in making sound decisions. areas, shortcomings, operational and organisational risks and their influence on economic performance.

WHAT SKILLS DO CFOS NEED? The monitoring of greenhouse gases, water and power usage will require accounting practices quite similar to monetary currencies such as expense reporting and product and customercost reporting. That’s the good news. Obviously, CFOs must become competent in the accounting methods used for non-economic resources, such as car-

ARE CFOS “EMBRACING” THE SUSTAINABILITY MOVEMENT? The answer depends on the interpretation of the term “embrace.” Most CFOs are personally cognisant of the new era. But truly embracing sustainability and greening will likely require regulations, standard reporting and cap-and-trade market forces to bring traction. There is a price that can be placed on carbon dioxide and other environmental factors. This needs to be done and put in a market context. The current climate-energypollution situation is an opportunity disguised as a problem. These methods

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and on economic systems at the local, national and global levels. Therefore, an extended financial performance aspect involves sustainability measures that take reporting beyond the traditional measures of performance and quality. In addition, greenhouse gas and energy reporting to satisfy the triple bottom line will introduce new data sources and data collection procedures, but reporting methods used by accountants will be similar to those already used.

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are in their infancy. In the U.S., by press time, the House had passed its version of the American Clean Energy and Security Act and climate change legislation was making its way through the Senate.

WHAT ADVICE IS OFFERED FOR CFOS DEALING WITH THE GROWING SUSTAINABILITY AND GREEN LANDSCAPE? CFOs need to accept that this movement is here to stay. Their challenge is to start thinking of the organisation’s social and environmental responsiveness as an asset and opportunity, not as a liability and extra cost. Implementing CSR must take the important step from a cost focus to a value-creation focus, where life-cycle assessment, energy/carbon management and design for environment become strategic tools for managing the bridge from cost to value. This will be a strategic process challenging CFOs to support

Top priorities, challenges

FOR THE CFO, a key challenge will be to balance new and unfamiliar compliance reporting activities while assisting the organisation in making sound decisions regarding improvement efforts. With accounting, CFOs balance external financial reporting for investors and regulatory stakeholders with internal managerial accounting that is valuable to the organisation for internal decision-making. If CFOs primarily focus their energy on compliance reporting, then managers and employees alike are denied the managerial information needed to improve the organisation’s performance. Too much emphasis on compliance reporting can also have a negative impact on social and environmental reporting efforts. As a result, only minimal contributions are made toward finding ways for management to reduce the organisation’s carbon footprint. Therefore, weighting the indicators that affect the triple bottom line reporting will become an important issue when optimising organisational performance in the context of sustainability. In short, CFOs will need to encourage their organisations to formulate sustainability and green strategies

at the same time they are supporting enterprise performance management initiatives.

check out the guide-lines of the Global Reporting Initiative, which are said to be voluntarily followed by more than 1,000 organisations in 60 countries. GRI is a nonprofit network-based organisation (based in The Netherlands) that produces one of the world’s most prevalent standards for sustainability reporting — also

Environmental reporting will result in the emergence of CSR and green scorecards, including measurements of success areas and shortcomings. their organisations in making new types of decisions based on new information. Not all of this information will be conventional numbers that can be consolidated easily. Therefore, the CFO should help build a knowledge management organisation that can calculate company performance, including unstructured environmental, climate and social parameters.

WHAT RESOURCES ARE AVAILABLE TO GET UP TO SPEED? An Internet search will produce a landslide of information. For starters, to understand sustainability reporting, 34

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known as “ecological footprint”—guidelines and aims to make sustainability reporting by all organisations as routine as and comparable to financial reporting. Value reporting (as noted on GRI’s web site) is where organisations publicly communicate their economic, environmental and social performance. Among past supporters listed on GRI’s site are: European Commission, UN Foundation, World Bank, Bill and Melinda Gates Foundation, Rockefeller Brothers Fund, the Soros Foundation and governmental bodies from the United Kingdom, Sweden, Germany and Australia. Another good source is the book, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and

Build Competitive Advantage, by Daniel Esty and Andrew Winston.

SUSTAINABILITY CAN BE PROFITABLE Organisations face the perceived paradox of simultaneously trying to manage social performance for the “betterment of the planet,” while maintaining financial performance for shareholders. This creates challenges to develop information systems to identify opportunities and support decisions. Through innovative thinking, they can develop new methods that both increase revenues and reduce costs. And higher profits provide executives discretion to divert some of the increase in retained earnings to more environmental investments. Understanding the cost-versus-benefit ratio of sustainability initiatives will involve analytics similar to those used in performance management. The better an organisation understands the ratio, the better its financial performance. GARY COKINS (GARY.COKINS@SAS. COM) IS A PRODUCT MARKETING MANAGER FOR WORLD-WIDE PERFORMANCE MANAGEMENT SOLUTIONS AT SAS, A CARY, N.C.-BASED BUSINESS ANALYTICS SOFTWARE AND SERVICES PROVIDER. © FINANCIAL EXECUTIVES INTERNATIONAL

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inpractice

Climate change 101 IT’S A RACE TO SAVE THE PLANET

The role that the renewable energy sector can play in mitigating climate risks is immense, says Robin Banerjee

PHOTOS.COM

t is for the first time in more than 60 years that so many nations got together to discuss and thrash out a common issue—at the Copenhagen Climate Change Conference. Since 192 countries got themselves involved, one would appreciate that it must be a pretty serious business. The subject matter of discussion was to “address global warming”. What is global warming? It is an average increase in the earth’s temperature, which in turn could alter global climate. Scientists have come to the conclusion that this warming takes place thanks to an increase in the quantity of greenhouse gases in the atmosphere, due to human activity. What is greenhouse effect? There are several gases that are present in the earth’s atmosphere, with some gases allowing heat from the sun to pass in and warm the earth—but they also prevent the heat from escaping the earth. These gases are called greenhouse gases (GHGs), and the effect is called greenhouse effect. If the heat from the sun entering the earth’s atmosphere does not dissipate, then the earth’s temperature will rise. GHGs include carbon dioxide, methane, nitrous oxide, etc. It may be pertinent to note that other gases in the atmosphere such as oxygen and nitrogen don’t cause this kind of warming.

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HOW MUCH CAN THE TEMPERATURE CHANGE? During the ice age, which was about 15,000 years ago, the temperature of the earth was 7 degrees Celsius lower than it is today. Scientists are now predicting that global temperatures may increase between 1 and 6 degree Celsius by the end of this century, leading to a disastrous effect on mankind. Since the industrial revolution, the quantum of carbon dioxide in the atmosphere has gone up by 40%. This is happening because modern mankind is generating huge emissions of carbon dioxide, mainly from burning of

resources such as wind, sunlight, geothermal heat, tides, biomass, etc—will singularly help in addressing the potential catastrophe which is staring at us. Nuclear energy will also help, though it has limitations in enhancing its usage due to its inherent potential for hazards. What should businesses do? The foremost issue is to understand the problem which our globe is facing and then take appropriate actions to mitigate the risks, by generating more and more green energy (energy generation using lesser fossil fuels). Given the context of global warming and the necessity for mankind to change their consumption habits, several businesses are likely to be potential winners in another two decades or so. Similarly, some businesses could also encounter difficulties over emissions. If one has to hazard a guess and look into a crystal ball, one could perhaps lay down the potential winners and losers as follows: Possible winners: renewable energy companies, nuclear power generators, battery-powered car manufacturers, electricity-generating companies having developed carbon capture technology,

there was a beginning. Among the agreements generated, the summit has agreed that the temperature rise cannot be more than 2 degree C beyond the pre-industrial era. However, a legally binding climate agreement could not be achieved. While the greening of the world will require a lot of money, it could not be decided who will fund them, though an understanding has been entered into stating that the developing countries will require funds of $30 billion per annum between 2010 and 2013 and $100 billion by 2020 from the developed countries. The allocation of this funding will provide a huge fillip to the renewable sector. It is also expected that by February 2010, several countries will inform the UN as to how much carbon they are proposing to reduce, though it will not be a contractual obligation. In short, the Copenhagen agreement has brought some progress, but failed to deliver a binding timetable. The future for the renewable energy sector looks very bright, with the whole world focusing on the impending global warming and the need to do something about it. The Copenhagen Summit has

The Copenhagen Summit, held in December last year, has brought some progress, but has failed to deliver a binding timetable. energy-efficient companies and so on. On the other side, there are oil and coal producers, traditional power stations using coal, petrol and diesel car manufacturers, steel industry using highly traditional energy technology, manufacturers producing energy-inefficient products and so on. Now, what happened at the Copenhagen Summit? While there was a huge expectation from the political leadership of the world, the outcome was not encouraging enough. However, one can say

not only helped highlight issues, but it has also made progress in several directions. All eyes are now on the next summit, scheduled in Mexico for next winter, where it is expected that mankind will bind itself to deliver a greener world, with a binding framework of targets and actions. THE AUTHOR IS CFO, SUZLON ENERGY

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Climate change 101

petrol, diesel, coal, etc (fossil fuels) and wood. Deforestation results in increased gases in the air, as it reduces the absorption of carbon dioxide by trees. Hence, both burning of fossil fuels and deforestation are wreaking havoc on our environment. How much warming can we live with? The Copenhagen Summit, held in December, has come to the conclusion that if the temperatures rise beyond 2 degree C above the pre-industrial era levels, catastrophe will strike. Prior to the summit, there were serious debates and a lack of unanimity as to how much rise in temperature can the human race cope with. What will happen if the earth’s temperature rises beyond 2 degree C? It will lead to the melting of ice, resulting in rising sea levels, and threaten the lives of millions in cities such as Mumbai, New York, Tokyo and London. Several islands, including Maldives, may go under water. Agriculture is likely to get impacted and some cereals such as wheat and paddy are unlikely to grow any longer. How will mankind live, if their basic staple foods don’t grow any longer? Who is responsible for this mess? Mainly, two countries in the world: the US and China. Between them, they generate 40% of the world’s carbon emissions. Of the total global emissions of about 30 billion tonnes, the US and China generate about 6 billion tonnes each. So, the countries that can really make a difference to the world’s carbon generation is the US and, of course, China whose issue is that it has also a huge population. What should be done now? The answer is very easy—generate less emission, produce less carbon dioxide. Hence, electricity—enormous quantities of coal and oil are now being used to generate it—needs to be also produced through ways that don’t generate emissions. Substituting these energy resources is a must for mankind. Use of renewable energy—from natural

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inpractice

accounting IS INDIA INC READY YET FOR IFRS?

Concerted efforts needed to ensure a smooth and cost-effective transition, say experts BY ULLEKH NP

PHOTOS.COM

t is going to be a bloodless revolution in Indian accounting, but a lot of people have their blood pressure in the unviable, high range while talking about International Financial Reporting Standards (IFRS) which India plans to adopt by April 2011. For sure, there will be drastic changes in the way companies report their financial statements as India becomes one of the more than 150 countries that are likely to adopt IFRS by then, but is there really a major cause for worry or is it sheer paranoia? At a briefing on IFRS compliance organised by 9.9 Media in association with Oracle, delegates didn’t give yes-or-no answers on whether IFRS is good or bad for Indian businesses, and instead chose to look at the challenges, uncertainties and ways to make smooth and costeffective the transition from Indian accounting standards to the most widely accepted global accounting standard. Well, this full accounting convergence, which the Indian government says it won’t postpone despite pleas from several quarters, is not just a technical exercise but involves an overall change in not only the perspective but also the very objective of accounting in the country. It is in that context that Vikash Mehrotra, director, enterprise project management, Oracle, revealed that very few people in India thought that the transition to IFRS would be beneficial for their businesses. He warned that, therefore, it was imperative that “all

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companies not only evaluate the impact but also clarify the ambiguities and controversies surrounding the move to IFRS”. The chairman of Deloitte Haskins and Sells, NP Sarda, also felt that though IFRS is gaining in popularity across the world as a single, consistent accounting framework, there are numerous uncertainties, issues, challenges and controversies associated with the full convergence to that practice in the country.

accounting

The foremost challenge is of maintaining consistency with the legal and the regulatory requirements prevalent in India. According to Sarda and some other delegates, the regulatory provisions in India such as the SEBI Act, the RBI Act and so on would “conflict” with several IFRS requirements. In fact, the Central Government has appointed a group to study and discuss issues that would have to be considered to facilitate regulatory convergence with IFRS. “Both RBI regulatory policies as well as IFRS have their respective advantages and disadvantages and we should keep those that are required in the Indian context,” Sarda said. Sarda also called for simplification of the process of valuation of financial instruments which he said was now “extremely complex”. Sarda was equally concerned about the volatility of fair value which could affect operating results; fair value is the estimated value of all assets and liabilities of an acquired company used to consolidate the financial statements of both companies. In IFRS, the main objective of the balance sheet is to represent the true state of affairs. The shareholders change regularly, even ownerships change—so the balance sheet must be the true representation of the business. In this country, on the other hand, the financial statement is prepared with a different purpose in mind, the profit achieved during a period, said Deloitte’s Sarda. Oracle’s Mehrotra, on his part, also cited the example of financial statements and the purpose they serve in the Indian context as opposed to their purpose under IFRS. “The profitability of the company is the main objective of financial statements here as it directly impacts investors and lenders and serves as a key performance indicator for management. However, under IFRS, the standards are significantly differ-

EXPERTS SUCH AS NP SARDA (ABOVE) ARE SEEKING SIMPLIFICATION OF THE PROCESS OF VALUATION OF FINANCIAL INSTRUMENTS WHICH THEY SAY IS “EXTREMELY COMPLEX”.

ent and full disclosure is the main focus. Therefore, profitability could be impacted,” he said. Finally, said Mehrotra, the success of the convergence in question will depend on the levels of maturity of an enterprise whether it embraces “an accounting standard both from the compliance perspective as well as from the market philosophy angle or not”. He said, “Companies such as the Tata

3) Align the various aspects of the business with IFRS—this would include the key performance indicators (KPI), the stakeholders, vendors, etc. Meanwhile, Sarda said though Indian accounting standards are ultimately based on international accounting standards, there are a myriad number of conflicting issues and it will not be possible to converge with IFRS by simply preparing a check list of differences

What is required is a change in the Indian mindset without which a convergence with the true spirit of IFRS would not be attainable. Group where 60% of the revenue is coming from outside India have already moved to IFRS.” According to him, IFRS compliance is beneficial to companies in the international market. He also suggested some steps to make the transition to IFRS easier: 1)Study the impact of the move and determine the best strategy. 2)It is not feasible to incorporate all changes at once overnight. Rather, the changes should be gradually incorporated into the system.

between the two systems. “What is required is a change in the Indian mindset without which a convergence with the true spirit of IFRS would not be attainable,” he said. True, India is likely to continue encountering implementation challenges of IFRS, but accounting professionals could be in for a windfall in the long run: they may be able to sell their expertise in various parts of the world which means going global may get a new meaning in the lexicon of Indian accounting.

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GREEN SPECIAL

inpractice

insurance THE DECADE OF ECONOMIC ADVANCEMENT Products and services earlier meant for niche markets have now penetrated mass markets BY VIKRAM KOTAK

PHOTOS.COM

ith the advent of 2010, we come to the end of the first decade of the 21st century. I would like to refer to this past decade as the decade of “economic advancement” compared with the previous decade of “economic liberalisation”. This past decade witnessed rapid technology obsolescence. In the beginning of this century, the cellular telecom industry was unrecognised and cell phones were considered a luxury because only a minority could afford them. A minute’s call would cost as much as Rs 18.50 at peak hours and incoming calls were not free yet. Today, cell phones have reached most pockets and have become a necessity. Call rates have fallen to almost half a paise per second and handsets have come a long way from costing more than Rs 10000 to being available at Rs 1000. It is funny that something that didn’t exist 15 years ago has become such an integral part of our lives today. I wonder if pagers still exist! The first decade of this century also saw a marked growth in consumerism. Products and services that were earlier meant for niche markets have started penetrating mass markets—from colas to soaps to mobile phones to clothes to airlines. The spending power of an average Indian middle-class family has grown three-fold during the period. People who would eat at roadside eateries now enjoy eating at McDonalds. We must give all credit to our government for opening up sectors to private

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participation and for its social spending through NREGA and other schemes. There has been a transformational shift from product to service and finally to experience—we have progressed from home videos to multiplexes, music players to iPods, from less than 10 news channels in the earlier decade to more than 240 news channels that are now the latest icons of entertainment, covering live stock and commod-

Life insurance companies have

trillion

worth of investments in equity markets, almost a 9-fold jump over the last decade.

strategies, but has also tried to reach the bottom of the pyramid. Insurance penetration as a percentage of the GDP has improved from 2.1% at the beginning of the last decade to 4% (in 2008). During the same period, insurance penetration grew from 1.3% to 1.8% in China and fell from 44.4% to 44.2% in the US. This sector emerged as one

The last decade saw the entry of more than 22 private players in India’s insurance sector, offering a wider choice to consumers more than 22 private players, offering wider choice to consumers. Life insurance is no longer looked upon as a simple risk cover; it has become an attractive investment tool, thanks to Unit-Linked Insurance Policies (ULIPs) which are one of the most customer-friendly and long-term investment vehicles providing flexibility in asset allocation to policyholders. With the dawn of private life insurance companies, this sector has not just innovated its products and marketing

of the largest sources of employment generation in the country. It provided employment to 2.9 million individuals (including financial advisors) compared with 1 million at the start of the last decade. The share of life insurance in the financial savings of Indian households has grown from 12% (FY00) to almost 20% (FY09), which is a whopping five-fold increase from Rs 0.2 trillion to Rs 1.5 trillion. ULIPs empowered every household with an opportunity

to participate in the equity market. The share of equities in the household financial savings rose from 1% in FY01 to 9.2% in FY08 before decreasing to 4.7% in FY09 (due to the slide in the equity markets). Today, life insurance companies have Rs 2 trillion (end of 2009) worth of investments in equity markets, almost a 9-fold jump during the decade. For the Indian economy, this decade represented resilience, reforms, growth, change and hope. It showed considerable resilience and came out triumphant from two short-lived global recessions, multiple terrorist attacks and multi-party unstable governments. It successfully strengthened its footprint in the global arena, a clout that only few others can match. The signing of the India-US nuclear deal paved the way for India’s inclusion in G-8 summits. We have progressed from “needs” to “desires”, from “savers” to “spenders”, from “Third World” to “driver of the world”. With a professional and skilled workforce and a liberal and democratic polity, India is poised to take off as an economic powerhouse. It will be fascinating to watch what this new decade has in store for India. It is going to be fiercely competitive. In fact, indigenously made pacemakers are expected to be available at Rs 60,000, at one-fifth of the cost of an imported pacemaker. These transformations are providing new opportunities. However, there are challenges in the arena of developing infrastructure, building world-class defence, managing and fulfilling requirements of natural resources. There is also a need for fiscal reforms and focus on primary and higher education which is necessary for reaping demographic dividends and efficiencies. THE AUTHOR IS CHIEF INVESTMENT OFFICER, BIRLA SUN LIFE INSURANCE

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insurance

ity prices to weddings of film stars to hot political debates and controversies. Bajaj Auto’s scooters, once considered to be the pride of India, bid farewell at the fag-end of the last decade; it was a 20th century product which had outlived its utility and saleability in the age of the Nano. Cricket, a religion in India, also changed its hue. From its original identity of a five-day test match, it has come a long way in its new avatar of T20, offering more excitement and entertainment. A few big corporates that were unheard of in the earlier decade have now become powerful organisations. For example, Google’s revenue in 2000 was $20 million and today, it is in excess of $20 billion (100 times growth in 10 years). Google revolutionised the trend in communication and created milestones in internet search. Today, individuals, irrespective of geographical location, can see and talk to each other and look up to Google for directions and answers for almost everything under the sun. The last decade also witnessed the country’s life insurance sector progress from the pure monopoly of state-run Life Insurance Corporation (LIC) to

CFO

GREEN SPECIAL

inpractice

greenhouse gases TAKING THE NEXT STEP ON WARMING

Mohan R Lavi delves into the accounting and reporting guidelines issued by the World Resources Institute on greenhouse gas emissions.

“Experts say this global warming is serious, and they are predicting now that by the year 2050, we will be out of party ice.” —David Letterman

ver the past few months, much has been said and written about climate change and the steps that nations should take to reduce greenhouse gas (GHG) emissions. These are going to be topics of discussion among accountants, too, since industries are the ones that emit GHGs; and they have to report such emissions. With the world moving towards a single accounting language, International Financial Reporting Standards (IFRS), one can expect industries to be required to report emissions as part of their financial results. The World Resources Institute (WRI), through the World Council for Sustainable Business Development, has already commenced work in this regard by issuing the Greenhouse Gas Protocol Initiative, a sort of an accounting and reporting standard for emissions.

THE SIX STEPS This new standard talks about six building blocks for accounting and reporting emissions:

STEP 1

REVIEW GOALS

PHOTOS.COM

The five accounting and reporting principles identified in the WRI’s standard are relevance, completeness, consistency, transparency and accuracy.

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STEP 2

DEFINE BUSINESS GOALS

The ultimate goal of Scope 3 Carbon Accounting and Reporting (which will help companies to look at the impact of their corporate value chains, including outsourced activities, supplier manufacturing, and the use of the products they sell, on the environment) is to reduce global GHG emissions by reducing emissions

STEP 3

MAPPING THE VALUE CHAIN

The next step in accounting for GHG emissions is to map the value chain. To the extent possible, companies should create a complete process map and/or a complete list of sources and activities in the companyâ&#x20AC;&#x2122;s value chain. The purpose of mapping of the value chain is to identify the full range of possible Scope 3 activities before a company determines which are most relevant, and should be included in the Scope 3 inventory. To the extent possible, the process map and/or list of sources should reflect the complete value chain, including all suppliers and custom-

METHOD

DEFINITION

Physical Factors (mass, volume, energy, etc.)

Allocating the emissions of an activity based on an underlying physical relationship between multiple inputs/ outputs and the quantity of emissions generated

Market Value

Allocating the emissions of an activity based on the market value of each output/product

Review Goals

Define Business Goals

Map the Value Chain

Set the Boundary

Collect Data

Calculate emissions

greenhouse gases

across corporate value chains. Accounting and reporting of Scope 3 emissions can serve a variety of business goals, including GHG management, performance tracking and engaging partners in the value chain to expand GHG accountability. That will also bring in transparency. It will also help additional companies in the value chain (for example, customers, suppliers, service providers, etc.) manage their Scope 1, 2, and 3 emissions and public reporting of GHG emissions to inform and meet the decision-making needs of stakeholders.

REPORT

ers, all inputs (purchased goods and services) and outputs (sold goods and services) and all Scope 3 activities, such as transportation and distribution of purchased and sold products, including warehousing and retail, outsourced activities, waste disposal, use and disposal of sold products, business travel, employee commuting, etc. Upstream emissions are the emissions that occur in the life cycle of inputs, up to the point of receipt by the reporting company. Downstream emissions are the emissions that occur in the life cycle of outputs subsequent to sale by the reporting company while other Scope 3 emissions are limited to employee activities such as commuting, which are neither purchased nor sold.

STEP 4

SET THE BOUNDARY

After mapping the value chain, companies should identify which Scope 3 emissions are most relevant for them. They should prioritise Scope 3 activities based on their relative size and significance, with a view to prioritising those Scope 3 activities where the most significant GHG emissions and reduction opportunities lie. In general, sources and activities a company targets for GHG emission reductions should be accounted for and reported in the inventory. Doing so will allow a company to track and demonstrate progress toward its GHG reduction goals.

STEP 5

COLLECTING DATA

STEP 6

CALCULATE EMISSIONS

The standard suggests a fourstep process for collecting and evaluating data (which could be primary or secondary) which are to prioritise activities, assess data sources, collect data and evaluate collected data.

The report states that calculating emissions means allocating emissions. Two steps have been identified for this: The most appropriate allocation method depends on individual circumstances. Companies should use the most appropriate allocation method for a given circumstance. For example, when allocating emissions from freight transport, companies should allocate emissions according to mass or volume, depending on whether the capacity of the vehicle is limited by mass or volume.

CONCLUSION It could just be a matter of time before reporting GHG emissions is mandated to form a part of the Notes on Accounts or other disclosure norms of an entity. For further details, check out www.ghgprotocol.org T H E AU T H O R I S DIRECTOR, ARTHAGYAN MANAGEMENT SERVICES PVT LTD

JANUARY 2009

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GREEN SPECIAL

inpractice

risk management THE SCIENCE AND ART OF HEDGING

Experts look at ways to manage risks in a highly dynamic business environment

PHOTOS.COM

inance professionals know it only too well: they pursue the best hedging option like crusaders after the Holy Grail. They have to constantly analyse their company’s exposure to risks and attempt to minimise them through various means such as hedging, diversification and leveraging. But certainly, risk identification is no oneoff task since projects constantly evolve and new risks emerge while others may dissipate or reduce in importance, especially in times as turbulent as these. Hedging, as all finance executives know, is therefore both science and art. And in volatile times, the spotlight is clearly on the CFO who has to blend lessons from the past with intuition and insight to reduce his company’s exposure to bad events—that was the true spirit at a session organised recently by ICICI Bank, 9.9 Media and UCLA Anderson School of Management to discuss risk management in a dynamic environment. Bhagwan Chowdhry, professor of finance at UCLA Anderson, set the tone at the session, saying: “Every hedge is a bet. Hedging implies finding an instrument that’s moving in the opposite direction of the underlying exposure. Simply speaking, it is a way of countering the risk.” He also stressed on the need to identify and quantify economic exposure. “Why do most firms manage transaction exposure and not economic exposure?” “We must understand that exposure management without the use of equations is like leaving a job half done.…

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CFO INDIA BUREAU

Once we quantify the effect, we just need to find an instrument that moves in the opposite direction. So when 1% depreciation takes place, we utilise an instrument that generates as much gain as we lost on the economic exposure,” said Chowdhry. “A company should study three different scenarios— realistic, optimistic and pessimistic—at the time when the investment plan is being made. Statistical techniques such as Monte Carlo simulation could be used for this purpose. Integrating investment planning with the firm’s strategic planning is a tough task. Executives should be

“Sometimes, one needs to hedge merely to prevent a competitor from gaining an advantageous position. Hedging is a tool that can be used or abused....” BHAGWAN CHOWDHRY, PROFESSOR OF FINANCE AT UCLA ANDERSON SCHOOL OF MANAGEMENT

his company hedged its risks by modifying its business model. “Six to seven years ago, more than 40% of our business was generated from infectious diseases,” he said. “With health facilities improving, the demand in this segment was expected to decline. Lifestyle diseases, on the other hand, were increasing over the years. In addition, the ailing patients were primarily from a higher paying ability segment.” IPCA hedged

“Should things go in favour of a firm, the CFO’s contribution is not acknowledged. If things go wrong, the CFO comes under attack.” SHILPA KUMAR, SENIOR GENERAL MANAGER AND HEAD, GLOBAL MARKETS GROUP, ICICI BANK

its risk by diversifying into lifestyle diseases. Currently, 60% of its business comes from this segment. Taking part in the discussion, Shilpa Kumar, senior general manager and head, Global Markets Group, ICICI Bank, noted that a CFO had the hardest job in a company because he is usually in a no-win situation. “Particularly in a hedge, should things go in favour of the company, the CFO’s contribution is not acknowledged. On the other hand, if things move in the opposite direction, the CFO is usually blamed for speculating,” she said. She added that when the rupee appreciates rapidly, companies usually tend to lock in margins and protect themselves by selling dollars. “However, if the risk paradigm changes, one would suddenly witness emerging markets benefiting. Such a turnaround was witnessed in the October–December quarter last year … in such a case an economic hedge will not work,” she said, referring to a comment made by Chowdhry. According to Kumar, one of the favorable outcomes of the volatility in the past one year has been “the newly defined consciousness of boards of companies about hedging decisions”. She said Indian boards have become much more conscious about the required framework—how to measure risk, quantify it and act on it. “It is no longer an operation left to treasury any more,” she said. After all, hedging is no recipe for making money, but for managing risks.

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risk management

trained to think about the key drivers. This will enable them to take better decisions. Finance is often accused of being too number-crunching. By encouraging this practice, we are likely to change the culture of the firm,” he noted. He went on to say that “once we figure out the exposure that we want to eliminate, the next step is to find the right instrument that moves in the opposite direction”. He suggested that a company could either hedge its risk using a financial instrument or look at an operational hedge by “finding an entire business unit that has the opposite sensitivity, a practice commonly known as diversification”. “Hence, a firm has two options,” said he. “They can either hedge their investments through a bank or protect their cash flows by investing in a new alternative venture altogether.” Dwelling at length on quantification, he said, “That in itself is a difficult procedure. In certain cases, we may find an instrument that moves in the opposite direction. However, if the quantification is awry, our supposition about the risk may be wrong or overanalysed. Consequently, the presumed risk may never materialise.” He warned that though “cash flows are sensitive to overall market conditions, in certain cases, they may move due to reasons unrelated to exchange rates”. As a result, companies will be “stuck with an unutilised financial instrument. Due to external unaccountable factors, a company may end up indulging in speculation”, he added. Chowdhry summed up by saying that hedging is a must in today’s volatile scenario. “In some cases, one needs to hedge merely to prevent one’s competitor from gaining an advantageous position. Hedging is a tool that can be used or abused.… A CFO needs to build enough internal control within the organisation. It should be integrated with strategy and awareness should not be confined merely to treasury.” On his part, A K Jain, executive director, IPCA Laboratories, talked of how

CFO

GREEN SPECIAL

big picture

Managing the

Go-Green policy

There are rays of hope as well as clouds of despair, reveals a survey of India’s finance executives CFO INDIA BUREAU

WHAT GENERALLY APPLIES to companies worldwide is the moral of Hans Christian Andersen’s fairy tale on the naked emperor: once the emperor is seen to have no clothes, pretending otherwise in public becomes difficult. In fact, it isn’t easy not being green any longer in a world where climate change has already begun to wreak havoc on the environment and where prudent investors have started factoring climate-change risk 46

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into investment decisions. And even in emerging markets such as India, many companies are looking to take on the climate-change challenge by tapping some inherent opportunities of global warming such as selling eco-friendly solutions and products—but not all of them are doing it. A survey of India’s finance professionals by 9.9 Media reveals that there are rays of hope—companies can no longer

Organisations’ awareness of emissions trading 14%

Yes No

86%

Is the government playing a significant role in encouraging emissions trading? 39%

Yes No

61%

Companies’ willingness to participate in emissions-related projects 15%

Yes

ABSENCE OF A GOVERNING BODY Most finance professionals said the absence of a common governing body or agencies to educate corporates on carbon credits in India was the most common external hurdle for them in going green; carbon credits are awarded to countries or groups that have reduced their greenhouse gases below their emission quota. Carbon credits can be traded in the international market at their current market price. Many respondents also cited unavailability of a feasible technological solution as a stumbling block. The survey also came out with some interesting results: though climate change throws up a major challenge and an

big picture

afford just to pretend being green—yet there are clouds of despair: certain wise measures are still missing. Consider this: all respondents said emissions trading helped them boost annual operating profits of their companies; 90% said such trading enhanced their annual sales. However, not less than half of the respondents said their companies didn’t promote major emission-trading mechanisms such as clean development mechanism (CDM), joint implementation and internal emission trading. But all respondents said they expect carbon credits-related projects and investments to promote efficiency in systems and processes, leading to conservation of vital resources; more than 92% said such investments will enhance profitability and make a difference to their companies’ earnings and some 86% expected such measures to help cut business risk. The finance professionals surveyed were, however, equally divided on the question of whether such projects would provide stimulus to promote economic recovery or not. Quizzed about the reasons for not adopting emissions-trading mechanisms, nearly half of the respondents cited the lack of in-house awareness, knowledge and expertise as the major cause for worry. While at least 36% of them put the blame on non-feasibility of such projects due to unavailability of financial support, relevant technological solutions and capacity building, almost 10% believed that the lack of support from top company executives is another major factor. Meanwhile, more than 50% of those surveyed said managing environmental issues such as minimising their organisation’s carbon footprint was crucial, but not as important as managing their corporate brand and reputation as a greeningoriented company and developing new products and solutions to mitigate climate-change risks.

85%

opportunity, in most companies, it is corporate-level officials who are more involved in defining their environmental objectives than C-level executives which perhaps indicates where their priorities really are. While 34.5% said corporate-level professionals called the shots on environment-related issues in their companies, only 24.1% said their top executives such as CEOs were directly involved in the framing of their company’s green initiatives. Most respondents also said they would want to focus on or invest in renewable energy projects. While more than 70%

All respondents expect carbon credits-related projects and investment to promote efficiency, leading to conservation of vital resources.

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big picture

GREEN SPECIAL favoured setting up of projects in the renewable energy sector, only 25.9% said they would opt for investing in green technology in agriculture. To a question whether they are willing to take part in emission trading-related projects, 85% of the respondents said yes. At least 61% of them also believed that the Indian government is playing a significant supporting role in encouraging businesses to participate in the business of emission trading. Finally, despite several odds, the growing enthusiasm of companies to hitch a ride in the “green” bandwagon is inescapable, as the naked truth called climate change stares down at them.

People involved in defining an organisation’s environmental objectives 3.4%

Impact of climate change on organisations’ decision-making process 58.6

60.0 55.2

58.6

55.2

51.7

51.7 48.3

50.0 40.0

41.4

37.9

34.5

31.0

27.6

30.0 20.0 10.0

6.9

6.9 0.0

0.0

Developing corporate strategy

0.0 Planning new investments

Very Important

Managing corporate brand and reputation

Important

10.3

6.9 6.9

3.4 3.4

Development of new products or services

Not Important

3.4 Developing regulatory strategies

0.0 0.0 Managing environmental issues

Don't Know

Organisations’ perspective on carbon-related projects and investments

3.4% 24.1%

100

17.2%

Yes No

100 92 84 76

17.2%

34.5%

20 C-level executives Corporate-level strategists Business unit or functional managers

Plant managers Third-party brand managers Others Don’t know

Was there an impact of emissions trading on the organisation?

Ϯϵ

24 16 8 0

0 Enhance profitability and make a difference to the bottom line

Promote efficiency in systems and processes

Help in reducing business risk

Promote growth opportunities

Provide stimulus to promote economic recovery

Increased investment can have a negative impact on other industries

Implementation of carbon-trading mechanisms by organisations 60.0 51.7 50.0 40.0

37.9

30.0 17.2

20.0 6.9

10.0 0.0 Clean Development Mechanism

Yes

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Joint Implementation

International Emission Trading

None of the above

CFO

GREEN SPECIAL

LEADER’S WORLD ENERGY MANAGEMENT

GREEN IS THE

New Colour Bottom Line OF YOUR

Two words can sum up how companies will improve their bottom lines starting 2010: saving energy.

ABOUT THE AUTHOR David Lim is a leadership coach, best-selling author and two-time Mt Everest expedition leader. Contact him at david@ everestmotivation.com

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WITH SEVERAL ECONOMIES ACROSS THE GLOBE JUST STARTING TO PICK UP FROM THE GREAT decline of 2008-2009, the price of crude oil is already at $70 a barrel. In the short run, this is good news if you are in the oil and related businesses. But we must bear in mind that the earth has reached a tipping point with the global rate of consumption of the black, sticky stuff rising exponentially; on the other hand, new, large deposits of crude are being discovered at a lower rate. How we transition to alternative energy sources will differentiate companies—while many of them will lose millions by pay-

SOURCE MATTERS

MINDSET SHIFT A mindset shift is needed to move your organisation from treating the “going green” message from a “nice-to-have” approach to a “business-urgent” approach that impacts the company’s bottom line. Getting the chief executive officer’s nod for going green will result in a lot of cost savings—that is the key in rolling out any systemic (versus superficial) programme to make your organisation more environment friendly.

AN EYE FOR DETAIL

The greener your company the more the chances of GenY getting attracted to work for your company and to buy your products.

Doing an audit as to how you can make every single aspect of your organisation greener—from redesigning industrial manufacturing processes to recycling heat into coolant systems—is important. It avoids “cherry picking” of easy ideas, while leaving out serious energy-wastage areas. A client of mine, the Rane Group in Chennai, has won an international green award for its training institute building. How did they win it? Among other things, the company sourced building materials locally, used natural ventilation and breeze-inducive corridors judiciously and recycled waste.

Looking at areas where a marginal improvement in terms of energy consumption can result in significant reductions in costs is the way to go. As more Indian companies begin to globalise, understanding where you source your supplies from—and how you create your product—has a significant impact. For example, the world’s biggest retailer, Wal-Mart Inc, has realised that by sourcing supplies closer to where they will be consumed, it can save millions in the supply-chain segment. Shipping heavy detergents can be changed by increasing the detergent density—thereby saving energy to create smaller packaging containers as well as the amount that can be shipped at any given time. Those fuel-guzzling, air-conditioned buses in Singapore often have their engines on idle, even when parked, so a single person, the driver, keeps cool in the country’s humid climate. Educating those drivers and providing a comfortable alternative when on standby are just some simple things a company can do as part of an overall systems-based focus on energy savings.

YOUNG CONSUMERS Look long-term so that the energy savings of your company can impact other areas of your organisation such as the ability to attract and retain young graduates and talents in the GenY age group. A research by Maritz shows that younger consumers, popularly referred to as “ GenY”, are equally divided when making a decision to buy from a retailer based on its environmental stance. However, more significantly, half of those interviewed said they would buy more from an organisation that had a good environmental policy.

AS MORE INDIAN COMPANIES BEGIN TO GLOBALISE, UNDERSTANDING WHERE YOU SOURCE YOUR SUPPLIES FROM HAS A SIGNIFICANT IMPACT. FOR EXAMPLE, WAL-MART INC HAS REALISED THAT BY SOURCING SUPPLIES CLOSER TO WHERE THEY WILL BE CONSUMED, IT CAN SAVE MILLIONS IN THE SUPPLY-CHAIN SEGMENT.

FOR MORE INFORMATION AND FREE ARTICLES ON LEADERSHIP,VISIT: www. everestmotivation.com

JANUARY 2010

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leader’s world

ing the price of not transitioning effectively, others that have started off early will win kudos for that and achieve greater efficiencies. As your company’s chief financial officer, you can actually consider how to sell and implement the greening of your own organisation. The time is now.

CFO

GREEN SPECIAL

cfo lounge

NEW LAUNCHES

Samsung LED TV

GIZMOS

HTC Touch 2 Here are some flaunt-worthy gadgets for use in office and at home. THE MOMENT YOU take the Touch 2 in your hand, you realise it is an impressive gadget with a lot of promise. The gunmetal matte finish on its plastic body looks elegant. The phone is fast and the scrolling shortcut bar at the bottom of the home screen is handy for quickly launching certain applications. PRICE: Rs. 22,490

This 40-inch HDTV is quite a stunner. Thanks to LED backlighting, the display is really slim and the large stand is made of glass embedded with red highlights. The material used imparts a very upmarket look and feel. Price: Rs. 1,25,000

Sony DSC-TX1

SONY DSC-TX1 COMES in an uber-slim solid metal shell and is one of the sturdiest cameras around. This is a 10.2-MP, 4x optical zoom portable camera. PRICE: RS. 20,990

HP TouchSmart PC THIS ALL-IN-one

Compro VideoMate IP50W THIS ONE IS a security camera system that uses a network camera to remotely monitor areas of your office or home.

offering from HP is not an ordinary run-ofthe-mill PC. This sleek device is more a gadget than a PC and features a 22inch touch-sensitive screen. PRICE: Rs. 89,990

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JANUARY 2010

ad Re Y st OG Mo OLZINE N iaâ&#x20AC;&#x2122;sCH GA d In TE MA

Keeping the Dead Sea alive Teresa Cline is glad that a joint effort is on to tackle the water shortage in the salt lake

THE AUTHOR SAYS FLOATING IN THE DEAD SEA AFTER A MUD BATH WAS A SURREAL EXPERIENCE

WITH SO MANY people going green, eco-tourism is more popular than ever. Jordan has tapped into this trend offering tourists a bevy of carbon footprint-free ways to explore their country which borders the Dead Sea. My top three favourite experiences there included: Having a mud bath and soaking in the Dead Sea. The Dead Sea is one of the saltiest bodies of water in the world getting its name from its high salinity which creates an environment too harsh for sea creatures to survive. At 422 metres below sea level, the shores have the honour of being the lowest dry land point on earth. The low content of pollens and other allergens combined with the mineral content of the water help people suffering from diseases such as cystic fibrosis and psoriasis. The Jordan side of the Dead Sea is virtually undeveloped, showcasing the beauty of this natural wonder. I stayed in the near-by town of Madaba where I rented a car and took a day-trip to the Dead Sea. First I visited a beach-side day resort with showers and change rooms. When I arrived on the beach I was surrounded by “mud people”. People believe Dead Sea mud is good for your skin. I wanted the full Dead Sea experience, so I had my entire body covered in mud and then I soaked in the sun for 20 minutes letting it dry before washing it off in the water.

The feeling of floating weightlessly in water is surreal. No matter how hard I tried, I would not drown. How convenient is that? I sat back and read a magazine! Due to drought and water shortages, the Dead Sea is slowly drying up as water from the Jordan River continues to be diverted for irrigation purposes. It has been dropping at an alarming rate of 3 feet per year. Thankfully Jordan, Israel and Palestine have been working together to find a solution so that this treasure may be enjoyed by future generations. Visiting the place where Jesus was baptised. Next I visited the nearby site believed to be the biblical Bethany-beyond-the-Jordan where John the Baptist lived and baptised Jesus. (Many believe Jesus was baptised on the Israel side of the Jordan River, but who really knows?) I joined a walking tour led by a Bedouin who pointed out some areas of interest. We finished our tour with a visit to a modern baptism site where I placed my hand on my Lonely Planet guidebook and baptised my big toe in the Jordan River! Showering under a waterfall in Mai’im hot springs. Later I drove to the springs where the biblical King Herod once soaked. Numerous waterfalls and pools filled with warm water invited guests to relax and enjoy. I walked over to a large waterfall, sat in the grotto behind it and marvelled at the boiling hot water flowing out of the mountain before taking a shower. Wow! I have never felt more alive than I did at the Dead Sea. I can’t wait to go back!

cfo lounge

TRAVEL

The Dead Sea is slowly drying up as water from the Jordan River continues to be diverted for irrigation purposes.

TERESA CLINE IS a Canadian travel photog-

rapher who has a travel channel on YouTube called TeresaTheTraveler. She has travelled extensively in the Middle East, Europe, North America and Central America.

JANUARY 2010

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CFO

art review

ARTIST OF THE MONTH

The art of being active, green Mumbai-based Tushar Joag interweaves art with activism By Ullekh NP

JOAG’S ENLIGHTENING ARMY OF THE EMPIRE (ABOVE) MOCKS FORCES THAT DISPLACE PEOPLE AND HURT THE ENVIRONMENT

WE ALL KNOW that rapid urbanisation, along with rapid industrialisation, is one main cause of global warming. It hurts the planet as much as it hurts a vast majority of people and Mumbai-based artist Tushar Joag is worried about them both. A couple of years ago, following a state of brooding disquietude about what business art had in this world—does art need to exist at all?—he decided to interweave art with activism. He set up Unicell, a one-man corporate body, which he says is meant to make artistic interventions into India’s cityscape in a satirical way, addressing issues related 54

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GREEN SPECIAL

ABOUT THE ARTIST Tushar Joag was born in Mumbai in 1966. He completed his Bachelors in Fine Art in 1988 (Sir J.J. School of Art, Mumbai) and Masters in 1990 (M.S. University, Baroda). After spending two years (1998 to 2000) at the Rijksakademie van Beeldende Kunsten, Amsterdam, The Netherlands, he returned to Mumbai and co-founded an artists’ initiative, Open Circle, in 2000. He has been involved in organising and co-ordinating activities for the World Social Forum in Mumbai, Brazil and Kenya. He has participated in a number of national and international shows around the world. Some of his solo shows include “Willing Suspension” at Gallery Chemould, Mumbai, in 2005 and “Reconciliation and Truth” at Chemould Prescott Road, Mumbai, in 2008.

to development and bureaucratic lethargy and highlighting what one perceives as the disequilibrium of cities. His conscious efforts seemed to have worked as he emerged as one of India’s well-known contemporary artists over the past one decade and more—a period in which his works have provided a discursive platform for urban and developmentrelated issues. “I am sure the land-use pattern is bound to change with development, but the urbanisation-based development paradigm that we are witnessing is displacing huge chunks of the population and wreaking havoc on the environment as well … you can’t justify crass destruction of mangroves in the name of development,” says Joag who has, for years, followed issues of forced migration and was part of the Save the Narmada movement. He has travelled to various Special Economic Zones to talk to affected people—and then returned to organise “non-commercial” art exhibitions to highlight environmental and people’s issues. A voracious reader of graphic novels and comic books, Joag’s drawings, some of them with landscapes distraught by a million mutinies and wars or urban detritus, lie somewhere between the phantasmagoric and the comic. His works such as Mutants of the Street Vendors Mimetic Scheme Assume Their Forms exemplify that style. Equally vitriolic are his sculptures. His Enlightening Army of the Empire, a sculpture comprising a set of 16 quirky-looking robotic figures, look like creatures out of a comic book. But they carry arms that could very well be targeted at the human race. Well, the work is grim in appeal despite the visual flourish. It is because Joag looks at development with a broader sense of an artist who is also a public interventionist.

CFO

GREEN SPECIAL

books

NEW RELEASE

Easy to swallow MICHAEL POLLAN MAKES yet

PICK OF THE MONTH

Admirably lucid Adopt reality-based economics to avert future crises, says John Cassidy WHAT WE TEND to expect from veteran business journalist John Cassidy is not what we get from his latest book—there is no juicy corporate gossip. In the introduction to How Markets Fail: The Logic of Economic Calamities, he says, “This one doesn’t focus on firms and characters involved: my aim is to focus on the underlying economics of the crisis and to explain how the rational pursuit of selfinterest, which is the basis of free market economics, created and prolonged it.” The book offers a comprehensive account of the credit crunch of 2007-09, and goes much beyond. In fact, Cassidy looks at the crisis more through the eyes of a student of economics than a journalist. He traces the roots of what he calls utopian economics—championed by conservatives such as Milton Friedman, Robert Lucas and other members of the Chicago School—taking it from Adam Smith to former Federal Reserve governor Alan Greenspan. Cassidy, who covers business for the New Yorker magazine, says reality-based economics, which he says combines the rigour of economics with the realism of psychology— and conceived by the likes of Amos Tversky and Daniel Kahneman—is less unified but more effective than utopian economics. It is a plea, wonderfully written. —BY ULLEKH NP

Publisher: Penguin India Price: Rs 699

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JANUARY 2010

another assault on what he calls a corporations-sponsored “nutrientby-nutrient approach” to eating in Food Rules: An Eater’s Manual. This book is an extension of his previous, definitive work on food, In Defense of Food: An Eater’s Manifesto, in which he regretted the fact that people in the West no longer ate products of nature, but of food science. The outcome of that is what Pollan calls the American paradox: the more we worry about nutrition, the less healthy we seem to become. In his latest work, Pollan suggests some 64 easy-to-swallow food rules. Publisher: Penguin Books Price: $18.95

OTHER RELEASES

Green guide TALK OF WISE “green” steps and you’ve them explained in this book compiled by the Green Patriot Working Group. It tells you how a sustainable lifestyle could benefit our economies. Fifty Simple Steps to Save the Earth from Global Warming is a useful guide even for shopping. Publisher: Jaico Books Price: Rs 250

Know your follower THE COURAGE TO change is vital for a leader, says Ken Blanchard in The Heart of a Leader, which offers his wisdom and insight in aiming for excellence, maintaining integrity, helping others reach their potential, and much more. Publisher: Jaico Books Price: Rs 195

Connect with everyone AUTHOR MITCH JOEL argues that we no longer live in a world of six degrees of separation, but six pixels of separation since we’re all—especially businesses—digitally connected. The book, Six Pixels of Separation, offers you tips to connect better with the global audience. Publisher: Hachette Price: Rs 450