Green supply chains are a golden opportunity for India

Indian companies’ importance in global supply chains will depend on their ability to embrace best practices around sustainability.

Two recent data points capture the scale of the opportunity in India. In July, the IMF raised its projection for India’s GDP growth in 2023 to 6.1%, making it by far the world’s fastest-growing major economy.¹ Three months earlier, UN researchers confirmed that its population of 1.43 billion people now exceeds that of China.²

With a resilient economy and strong demographic tailwind, India is well placed to rise up the global value chain. It boasts a young population, with 52% under the age of 30³ and rapid rates of urbanisation – both of which point to continued productivity gains in the coming decades.

International investors and multinational corporations (MNCs) are paying close attention. Indeed, major groups across Europe, the US and Asia – from Apple, Samsung and Siemens to Kia, Boeing and Toshiba – are shifting more of their production to India.

The government has recognised the potential and is targeting export volume of USD2 trillion by 2030, nearly treble the USD770 billion in the 2022-2023 fiscal year.

To capitalise on these macroeconomic advantages, however, Indian businesses must continue to strengthen corporate governance and sustainability standards to earn their place in the supply chains of the future.

Supply chain shakeup

The shakeup of global supply chains is an opportunity for India, but it comes with increased scrutiny.

MNCs are increasingly focused on the environmental and social impact of their operations, and expect the same from their suppliers. Local businesses, however, have some catching up to do: in a 2022 survey of Asia supply chains, we found that more than half (54%) of MNCs had already implemented environmental policies, compared to 19% of local and regional corporates.⁴

To capitalise on the realignment of global trade, India’s manufacturers will need to convince these sustainability-conscious buyers that they, too, can keep up with global best practices.

Many of India’s leading manufacturers are taking action. Shahi Group, a leading apparel exporter, is investing in solar and wind farms to meet a target of 100% renewable energy in its operations by 2026.⁵ Major conglomerates such as Godrej Group and Tata Group have invested in sustainable supply chain initiatives.⁶

Smaller businesses will also need to be aware of global expectations if they are to win or retain international clients in the years to come.

First and foremost, Indian exporters will need to measure and report on their carbon footprint and other sustainability metrics to keep pace with fast-evolving regulation.

In late June, the International Sustainability Standards Board released its inaugural climate disclosure framework – a key step towards standardised disclosure of climate risks for listed companies globally.⁷ The Reserve Bank of India also plans to issue a framework on climate risk and disclosure for lenders.⁸

Companies in India are certainly making progress, with CDP India reporting a 40% increase during 2022 in environmental disclosures across CDP’s three themes – climate change, water security and forests.⁹

Sustainability reporting, however, is not just an issue for listed companies: it is increasingly a requirement of doing business with international buyers.

The German Supply Chain Due Diligence Act, which came into force in January 2023, is the clearest example of this push for supply chain transparency, requiring major German businesses to monitor their entire supply chains for labour exploitation and environmental degradation.¹⁰ The European Union is working on similar legislation that will apply across the bloc.

Energy intensity

India’s dependence on fossil fuels makes energy-intensive businesses in India particularly vulnerable to low-carbon competitors. India last year generated nearly 75% of its energy from coal, contributing to a hefty carbon footprint for companies that rely on electricity from the national grid.

This issue will become more pressing as the EU begins phasing in the Carbon Border Adjustment Mechanism from October 2023.¹¹ Initially applying to carbon-intensive goods including steel, cement and aluminium, the mechanism aims to prevent EU companies from circumventing emissions targets by imposing a tariff on imports based on their emissions intensity, potentially making Indian exports much less competitive. Conversely, companies that lower their emissions footprint by using renewable energy will have a competitive advantage.

Once exporters have assessed their carbon emissions, energy efficiency is often the first step towards a more sustainable future. According to ABB Energy, half of leading Indian industrial and commercial decision-makers have increased investment in improving energy efficiency.¹² Replacing a 20-year-old industrial electric motor with a modern solution, for example, can cut its energy consumption by up to 30%.

Circular practices to reduce the use of primary resources can also bolster sustainability credentials. Deforestation and pollution are serious issues in India, which signed up to the Kunming-Montreal Global Biodiversity Framework in December 2022 to arrest global biodiversity loss. Globally, however, the corporate world in general is severely lagging when it comes to addressing biodiversity challenges, found a report published in May by Imperial College Business School, in partnership with HSBC.¹³

Indian exporters that can get ahead of the curve in this area will, again, put themselves in a stronger position for attracting international business.

A global partner

Companies often find they need help putting a sustainability plan into action. Many lack staff with the relevant skills or are reluctant to devote capital expenditure to sustainability initiatives with an uncertain payback profile. Small and medium-sized businesses, in particular, often need help understanding the issues at hand and accessing the financing they need.

As the world’s largest trade finance bank, HSBC is ideally placed to advise Indian exporters on evolving expectations and regulatory requirements in their industry sector. We also draw on our global connections and deep understanding of supply chains to help Indian companies access new opportunities and build their knowledge of sustainability issues.

Sustainable suppliers also enjoy better access to finance. In partnership with HSBC, US retail giant Walmart has established a trade financing programme whereby qualifying suppliers are rewarded with preferential terms.¹⁴ Similarly, global suppliers to PVH Corp, whose brands include Calvin Klein and Tommy Hilfiger, can access funding based on environmental and social criteria.¹⁵

Indian businesses unquestionably have a golden opportunity to gain a bigger share of the global market. Their green and sustainability credentials will determine just how big that opportunity will be.