In the past few months, there has been a sudden awakening of mainstream interest in India around pollution issues. The newfound interest can be traced back to the widely debated measures taken by the Delhi government to curb pollution, the Agreement on Climate Change in Paris (COP21) and even World Health Organization (WHO) reports on the alarming levels of air pollution in Indian cities. Some of the statistics are damning.
According to WHO, 13 out of the 20 most polluted cities in the world are in India; pollution levels in the most polluted city of Delhi as measured by particulate matter most harmful to respiration (PM2.5) are almost thrice that of Beijing and nearly 15 times more than that prescribed by WHO (see chart). The implications have been severe, such as a reported four-fold increase between 2008 and 2015 in the number of patients with respiratory ailments at the All India Institute of Medical Sciences in Delhi. A Deutsche Bank report cites a study by the Royal College of London that found an increase in PM2.5 by one microgram per cubic metre reduces life expectancy by three weeks, which implies that such alarming increases could chop off a significant portion of one’s healthy years.
We have seen a similar spike in interest about the issue in China before. In January 2013, Beijing experienced a prolonged bout of smog, so severe that residents termed it “Airpocalypse”. PM2.5 levels reached 40 times the WHO standard prompting the Chinese government to swing into action. In December 2013, the National Development and Reform Commission (NDRC) issued the first nationwide blueprint for climate change, outlining an extensive list of environmental objectives for 2020. A crackdown on polluting factories and mandatory real-time disclosures on air emissions and water discharges followed, with Premier Li Keqiang declaring a war on pollution in March 2014.
Even in India, the Union and state governments have been alive to the problem and instituted a series of measures to control this menace. While the jury is still out on how successful or achievable some of them are, what is certain is that we have barely scratched the surface in tackling the issue. If the first step in solving a problem is acknowledging that you have one, we have crossed that hurdle. The second important step is trying to correctly frame the problem, which would mean getting good, timely information on the sources of pollution. Nationwide data on the sources of pollution is hard to come by. Also, it is difficult to extrapolate global data as sources of pollution are not comparable. Burning firewood as cooking fuel, for instance, is a major source of pollution in India, unlike in most parts of the world.
While getting timely data should be a priority, equally important is coordinated action on the issue. Public policy will have a big role to play here and the states and Union will have to work in tandem for this. What we see currently is disjointed and localized action treating the symptoms rather than the disease. Certain policy actions have unintended consequences, especially when viewed through the lens of their impact on pollution. In 2014-15, the railways significantly hiked haulage charges for freight transport, which coincided with a large reduction in diesel prices making road transport for freight more economical. This meant that transporters aggressively shifted from rail to road. This is evident in near-zero growth in rail freight traffic and a heady 20% growth in sales of commercial vehicles. What this has effectively done is shifted freight movement in the country to a much more polluting form of transport.
A similar unintended consequence was the large growth in the sale of diesel vehicles in the country between 2011 and 2013, when diesel was subsidized and petrol and natural gas were not and consumers preferred to buy diesel vehicles due to this incentive structure. Or take the case of industrial fuels like furnace oil and naphtha as compared to use of natural gas for industrial purposes. These fuels are infinitely more polluting than a gas-based solution and yet in a state like Gujarat, fuel oil attracts only 5% sales tax while natural gas for industrial use is taxed at 15%.
Ideally, a solution which is more environment-friendly should be incentivized but priorities have clearly been elsewhere in these cases. Such consequences have to be acknowledged and studied at the design level itself, with environmental considerations embedded in all facets of policymaking.
In case you are wondering if we have switched professions from being institutional money managers to being green activists, we haven’t. Institutional investors and our clients have become increasingly focused on environmental, social and governance (ESG) related matters of companies that we invest in. The number of asset manager signatories to the United Nations Principles of Responsible Investing (UN-PRI) is growing rapidly and this means that there will be increasing and more widespread pressure on governments and corporations to make ESG a centrepiece of their policies and strategies.
As investors, we are a spending considerable amount of time trawling through business responsibility reports that form part of firms’ annual reports, a section that, honestly speaking, we flipped over a few years ago. It is a given that more money is going to chase companies that score highly on ESG and that will result in premium valuations. From an investing standpoint, this will be an enduring theme in the markets and firms that help provide environment-friendly alternatives to existing methods will be huge beneficiaries.
In the Indian context, these could be providers of city gas, technology firms that help reduce emission, those engaged in production of clean power or facilitating it as financiers or contractors. Companies and investors will do well to sit up and take notice of this new trend.
AmayHattangadi and SwanandKelkar work with Morgan Stanley Investment Management. These are their personal views.
