The CFO’s role in sustainable finance is evolving, integrating ESG principles, digitalization, and strategic investments to drive long-term value, regulatory compliance, and environmental responsibility in corporate decision-making.
K Gopala Desikan, Group CFO, TVS Motor Company.
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I have divided my presentation into two parts: the basics, which cover the theoretical aspects, and the specifics of what we do in our organisation. There are ten important trends shaping the future of finance:
- Raising the bar from a trusted business partner to a steward of value creation
- Dynamic financial planning
- Cash is king (again)
- AI becoming the real deal
- A new era of ESG begins
- Operational excellence
- System and data modernisation
- Future-proofing the finance organisation
- Building the dream team
- Knowing your investor and becoming your own activist
Cash has once again become king. At TVS Motor Company, we used to offer credit, but after COVID-19, we decided to adopt a cash and carry model. Initially, there was resistance from the sales and marketing team, but today, we are generating positive free cash flow. For finance professionals, cash is always a crucial element.
Our internal audit process is now almost entirely AI-driven. As we transitioned towards digitalisation, we evaluated our manual processes and aimed to eliminate them. While we haven’t achieved complete automation, we have made significant progress. We have yet to fully eliminate Excel, which, despite being useful, can be dangerous. Sometimes it misleads. I’m not questioning Excel’s utility, but it is a manual intervention tool.
Aside from ESG, the most important aspect is building a strong organization and talent pool. The opportunities for finance professionals are immense, and we must relearn many new skills. The final phase involves investor relations, a portfolio I’ve been handling for some time. Investors’ expectations have significantly changed. Some institutions now request discussions about our ESG initiatives.
ESG might seem like an expense, but we should think beyond traditional accounting. Although it may not provide immediate payback, ESG is an investment for the future. From an accounting perspective, we might write off ESG as an expenditure, but I always consider it a future investment, creating something unique for the future. This provides a background on ESG.
The Three Equities
Sustainability hinges on three core equities: environmental, social, and economic. The crucial principle is that consumption must not outpace replenishment, and pollution should remain within the limits of nature’s restorative capacity. We have a responsibility to protect and actively replenish natural resources. Social equity ensures that basic human needs are met, while economic equity focuses on value creation throughout a well-governed value chain.
In our company, we strive to deliver quality vehicles that offer value to the end customer. Our dealers are expected to uphold governance principles and treat customers fairly. Our suppliers must adhere to ESG (Environmental, Social, and Governance) considerations. By integrating ESG principles across the entire value chain, we foster significant positive economic activity. This holistic approach embodies the evolution of the triple equity framework.
Sustainable Finance
Sustainable finance involves integrating and embedding ESG (Environmental, Social, and Governance) aspects into financial figures, whether through investment decisions or capital allocation. Green investment refers to investing in initiatives that promote a favourable natural environment, conserve natural resources, and reduce carbon emissions. Such investments should not be viewed merely as costs but as opportunities for significant future benefits.
Regarding risks, there are two main types: financial risks and regulatory risks. Financial risks involve uncertainties, as it is not always certain that benefits will be realised. These investments are strategic, with the potential to deliver long-term rewards. In contrast, those who do not follow ESG principles may be more competitive in the short term but face long-term implications.
Regulatory risks arise from compliance requirements. Regulators sometimes offer incentives, such as benefits for customers purchasing electric vehicles, PLI benefits for manufacturers, and GST reductions. Non-compliance can result in carbon tax-related penalties. Thus, while there are risks associated with ESG activities, they can be mitigated with a broader outlook on long-term benefits.
Increase in the Bottom Line
ESG considerations must be incorporated into planning processes, scenario planning, capital expenditure (CapEx) decisions, and performance dialogues. Nowadays, even performance incentives are linked to ESG deliverables. Establishing processes and systems, monitoring them, ensuring controls, and proper reporting are very important. The concept of linking performance appraisals to ESG achievements, especially at senior levels, is gaining traction.
Quantification and communication are essential. Merely undertaking ESG-related work is insufficient; effective communication—both internally and externally—about the actions taken and the future benefits is necessary. Questions about ESG initiatives and investments made in each and every quarter are common from both investors and regulators. It is our responsibility to ensure ESG considerations are adequately addressed.
Revenue generation should be highlighted as well. Operating cost savings, productivity improvements, and reductions in quality, energy, interest, and other costs can enhance the bottom line. Failure to act may result in lost opportunities or penalties. Tax incentives associated with ESG investments should be factored into investment decisions. Today, customers are often willing to pay a premium for compliance with ESG principles.
Investors have expectations, and it is our duty to clearly communicate our ESG (Environmental, Social, and Governance) considerations and the value we derive from sustainability initiatives. I personally believe that, if properly implemented, these efforts could result in a 3% to 5% increase in EBITDA. In digitalization, we can achieve a 2% increase. The advantages may come in the form of energy savings or waste recycling.
ESG Initiatives in TVS
In our organisation, we ensure that our factories and scrap yards are so clean and well-organised that one could comfortably dine in these places. We clearly demarcate reusable items and ensure that every reusable item is brought back into the production system.
Water Treatment: With around 12,000 people in our factory, we implement effective water management which is crucial due to the high costs of water involved. There are tangible, quantifiable benefits that increase profits and impact the P&L statement.
Measuring ROA: Direct financial returns can come in the form of top-line increases, productivity improvements, or absolute cost savings. Effective ESG (Environmental, Social, and Governance) management can potentially reduce insurance premiums. Addressing climate risk is essential, as a 2% increase in temperature can severely impact the economy, demand, productivity, and consumption. Maintaining and enhancing our brand and reputation, built over 100 years, is critical, as ESG compliance significantly boosts brand value. Although brand and reputation are not easily quantifiable, they are crucial for long-term success.
Investors expect market stability and value government incentives. For example, the GST on electric vehicles (EVs) is 5%, compared to 28% for conventional vehicles. PLI benefits are substantial, and government incentives should be considered in project decisions and long-term financing.
Financing Options: We have green bonds or sustainable loan bonds. A loan or bond represents an agreement between a banker/lender and an entity, also known as a transition bond, where the use of funds is defined for ESG investments. Sustainability-linked bonds do not have an end-use link. We have the leverage to renegotiate the bond terms when ESG-related KPIs are achieved.
The global bond market, which was $38 billion in 2014, has now surpassed $4 trillion. In the first half of FY 23-24, 11% of bonds issued were in ESG format. In India, green loans and bonds accounted for around 70%, with utilities and finance industries leading the way. The government is also a significant borrower of ESG-related bonds.
ESG funding is possible for every company. In India, 60% of EV two-wheeler funding depends on retail funds, with NBFCs playing a crucial role. With increasing EV penetration, NBFCs can access concessional funds, which can be passed on to end customers.
Suppliers: ESG-compliant suppliers can provide better working capital-related funding. Sustainable finance is similar to traditional products, with no extra documentation or negotiation. It offers a diversified lender base and access to long-term lenders who are more like investors. Loans of up to 30 years term are possible, offering potential pricing benefits and long-term funding, enabling our commitment to sustainability.
Governance: We must maintain the highest corporate governance standards, emphasising accountability, responsibility, and reliability. Our organisation has a dedicated committee to monitor ESGs, ensuring focus and commitment.
Double Materiality Assessment: Our process involves a double materiality assessment, asking key questions about the impact and materiality of ESG considerations on the industry and company. We assess the financial impact of ESG actions, both positive and negative. For example, in climate change and decarbonisation, we ask: a) How significant is it for our company and industry? b) What are the implications of considering or not considering it? Proper water management is crucial, and we evaluate its importance and associated costs.
Circular Economy: The production process generates a significant amount of waste, making the circular economy critically important. We recycle EV batteries. Many people wonder what happens to the batteries. Contrary to popular belief, batteries do not end up in landfills and create pollution. Lithium-ion cells are imported and used in battery packs, which have a life of three to eight years, with an average of five years. After their first life, batteries are brought back for segregation and given a second life of another three years. Through mechanical and chemical processes, 90% of battery materials can be recycled and reused.
Biodiversity and Nature: Believe it or not, we have a forest inside our factory. We undertake various projects and investments in clean transportation, including EVs and alternate fuel vehicles. We always ensure zero direct tailpipe emissions. Even in our conventional vehicles, we achieve CO2 emission reductions.
Renewable Energy: Today, 97% of the energy we consume comes from renewable sources, up from 45% seven years ago. We ensure everything is clean and focus on efficient energy usage. This includes the installation and maintenance of energy-efficient machines to save on energy costs. We have converted our fuel-based cooking vessels to fully electric operation. While cooking with electricity can be challenging, we have successfully automated the process to cater to 12,000 people every day.
Green Mobility Leadership: At TVS, we take pride in our leadership in green mobility. Our journey with electric vehicles (EVs) has been fascinating. Our first electric vehicle was launched long ago, and when we relaunched it, it was extremely well received. Today, we hold a market share of close to 25%. Initially, there were concerns about the range, weight capacity, and chargeability of our EVs. However, these concerns are a thing of the past now. EV penetration is gradually increasing in India, starting in urban areas with the scooter segment. In the next five to seven years, we expect significant EV penetration.
Quality and Partnerships: For the last seven or eight years, we have been rated number one by JD Power for quality in most of our products. We have a strong relationship with BMW, starting as a contract manufacturer and now designing, manufacturing, and developing for them. Total Quality Management (TQM) and sustainability are two sides of the same coin. We strongly believe in TQM, which is essentially discipline. We follow the PDCA (Plan, Do, Check, Act) cycle and prepare QC stories to ensure that problems do not recur.
Visiting our factory and interacting with our 10,000-strong workforce energises me. Their ownership and involvement in the process, including ESG considerations, amaze me.
Environmental Impact: Every EV sold saves 0.15 tons of CO2 per year. In the last three years, we have saved 300,000 tons of CO2 with less than 5% EV penetration. By 2030 or 2032, we estimate that 30% to 35% of all two-wheelers in the country will be EVs, resulting in substantial emission savings.
Inclusivity: We have employed many individuals, physically challenged and with speaking disabilities. In 2021, we hired 22 such individuals, and now we have 250 in various departments, including finance, factory, and production support. Our team members are learning their language and way of communication. Our chairman has set a target to employ a certain percentage of people from this category. We recognise their intelligence and efficiency.
CSR Activities: We have cleaned 21 channels, desilted 283 ponds, planted 750,000 trees, and developed 14,000+ acres. Our 65,000 women in self-help groups generate $12 million annually. We have renovated schools and health centres, with a dedicated team working on CSR activities.
Sustainable Practices: Since 1990, we have implemented rainwater harvesting in our factory and housing projects, ensuring water savings, increased greenery, and taken measures for extensive electricity savings. 25% to 30% saving using natural light is achieved in our housing projects. ESG considerations are integral to our real estate business.
At TVS,our vision is to transform the quality of life by providing mobility solutions that are exciting, responsible, sustainable, and safe. ESG is in our DNA. What we give back to society matters deeply, and our Chairman Emeritus and current Managing Director are highly focussed on this. We have complete freedom regarding ESG-related investments, with the objective of giving back to society in some form. Thanks to their guidance and support, we have achieved significant progress.
As CFOs, we are uniquely positioned with significant responsibilities. We are fortunate to have financial qualifications and analytical skills. With the advent of digitalisation and AI, we are well-placed to take forward the issues, as part of strategic integration.
