Dr Aswath Damodaran, popularly known as the “Dean of Valuation”, is a profound man with strong views. I have learnt considerably from him through his lectures and videos. However, when he opines that “ESG is not just a mistake that will cost companies and investors money, while making the world worse off, but that it create more harm than good for society,”, I must disagree with him.
Dr Damodaran’s hypothesis is that investing in Environmental, Social, and Governance (ESG) activities will lead companies to spend more money in doing “good” things and, consequently, deliver poor returns to the investors. While he has elaborated on this to some extent in his blog, his underlying conclusion is that either a company can deliver value to its investors or to its core stakeholders, but not both.
Here is where he is wrong. Let’s take environmental responsibility, i.e. the ‘E’ in ESG. His hypothesis implies that moving to renewables will place a cost burden on companies, and reduce returns to investors thereof. This is perhaps valid for developed economies where conventional sources of energy are available at competitive prices. However, when you look at a developing economy like India, it is clearly possible for companies to deliver a genuine environmental impact while also enhancing its bottom line.
At WayCool, we firmly believe that doing good has to be good for business. Every ESG project that we undertake is stringently measured through the cold calculations of ROI while simultaneously being environmentally and socially efficient, and more impactful than the traditional methods.
Let’s begin with energy management. We have started solarising our facilities one by one. In a solarised ecosystem, even if you operate your facility on a purely variable cost basis, the cost of power is at least 25% lesser than the cost of traditional grid power. Now, there is power available on tap, and you also save money while delivering better impact and reducing your CO2 footprint across multiple facilities. We solarised our Chennai Distribution Center on an OPEX model and today we are saving over INR 200,000 per annum in power bills. This is the cost saved in just one DC.
Let’s look at water management. Many people believe that water is free in India. This is not true when you consider the recurring costs that industrial entities have to incur on sewage handling. When sewage accumulates, we have to call sewage trucks to clean our septic tanks on a regular basis. Unfortunately, we don’t even know where the sewage is being actually disposed off since the control mechanisms are quite poor.
At WayCool, we have installed a very competitively priced water and effluent treatment plant. By deploying this plant in some of our largest warehouses, we are able to treat almost every bit of wastewater that we are generating. It is not just a water treatment plant, it is integrated into an overall water management solution. For example, the water that we use in our facilities is recycled up to seven times by passing it through several filters and then used for washing product crates and other process applications.
After the seventh time, the water and the wastewater are both taken out and are fed into an effluent treatment plant. This plant treats the water and makes it suitable for repumping back into the ground where the water is fed back into our garden or fed into our water harvesting system. We measure the amount of water that we draw and the amount of water that we charge. Over a period of time, the amount of water that we recharge will surpass the amount of water that we draw because our rainwater harvesting systems will get integrated into the wastewater treatment systems. Consequently, we will be pumping more water into the ground than what we lift. By recycling the water multiple times and then pumping it back into the ground after treatment, we avoid the usage of effluent treatment trucks or sewage trucks.
The cost savings, for one warehouse alone, translates to over INR 40,000. That effectively makes it possible for us to have a payback of less than one year in the effluent treatment plant. This is just another example of an impact program and clearly shows that one can be environmentally responsible and save money for the company at the same time.
Here is another example. Let’s look at Food Miles. At WayCool, we recognized early on that while there can be a lot of push towards alternative mobility like electric vehicles, the smartest thing to do is to reduce the length of the food supply chain itself.
To test our hypothesis, we ran an experiment on reducing the Food Miles of exotic vegetables like lettuce and broccoli. Bengaluru is one of the largest consumption markets of these exotic vegetables that are traditionally grown in the Nilgiri Hills. Besides being an eco-sensitive zone, the Nilgiri Hills are located approximately 360 kms from Bengaluru. This means expensive transportation using reefer trucks and long transportation distances that diminish the shelf life and hinder a smooth supply to meet the rising demand. The usage of reefer trucks also means high CO2 emissions while transporting these vegetables.
At WayCool, we partnered with a network of local farmers in and around Bengaluru where we found that the agro-climatic conditions were suitable to grow these exotic vegetables in the region itself. By doing this, we succeeded in reducing Food Miles from 360 kms to a mere 2 kms. This also meant that we no longer needed reefer trucks as we are now able to pluck fresh vegetables as soon as we receive the order. Apart from saving a significant amount of money in transportation, we are also preventing CO2 emissions because now the food is simply not moving the distance that it was moving in the past.
Last, but not the least, let’s look at one of our social impact initiatives. For packing and processing our food products, we could have easily built large factories. Instead, we chose to partner with a number of local entrepreneurs, who are closer to the source of production resulting in favourable cost structures and producing in large factories that are typically located near urban areas. As a result, our overall production costs have come down. At the same time, we have created new rural entrepreneurs in areas where the only source of income was farm income.
It is not a universal truth that ESG can happen only at a cost to the company. When you make cold calculations for every ESG-related activity, the way WayCool makes it, you automatically make a positive impact on your bottom line while tangibly delivering on the environmental side.
However, I do agree with Dr Damodaran on one aspect – a lot of ESG is now limited to only ESG reporting, and a lot of companies are essentially greenwashing their books. It seems to me that there’s a lot of focus on twisting and re-narrating stories to fit an ESG agenda, and therefore to draw down on ESG investments. It is also creating large segments of industries that hitherto did not exist, of paper producers in terms of ESG reporting.
This, I agree, is a waste of money and time. If companies actually focussed on doing work that delivered better impact on the environment and the societies around them, rather than focuses only on reporting what they are doing, or restructuring what they are doing, to fit a narrative of ESG, then I believe that there is opportunity to create a genuine impact rather than just create a cosmetic narrative to draw down funds from another pocket.
If you are going to do just ESG reporting and narrate the story differently than what it was before, then frankly, either you’re not being impactful on the ground or you are actually not being effective because you’re burning all your money on consultants and other ESG reporting organizations. In this case, definitely either the company loses or the stakeholders lose.
At WayCool, we are very clear about three things:
We firmly believe that being compliant using ESG projects like these is not just a good citizenship initiative, but a clear source of competitive advantage.
What we do today will be mandated by regulation tomorrow. And the cost of what we do today will actually be higher for legacy players as well as other startups to emulate at that point in time because there will be massive demand for the same technologies and the supply will be constrained because of the surge in demand whenever a regulation hits. We will, therefore, have a solid entry barrier and we intend to take the market at that point in time.
To sum it up, if done right, building sustainable enterprises is not always expensive, as Dr Damodaran asserts.
