Financial struggles and environmental degradation are at the forefront of global concerns and introduced “green insolvency”. Traditionally, the resolution process focuses on financial considerations and ignores their effects on the environment. Therefore, green insolvency includes integrating environmental considerations and sustainability principles into the resolution process.
The Need for Sustainability in Corporate Restructuring
Business sustainability refers to economic sustainability performance that promotes profitability and non-financial sustainability that may or may not create profitability. It is crucial to understand green insolvency in the context of business sustainability:
Addressing Global Challenges:
Climate change and environmental degradation demand responsible business practices and corporate restructuring must align with global sustainability goals like the United Nations Sustainable Development Goals. This includes practices on creating value for customers while also being concerned with people, ethics, equity, and environmental impacts.
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Redefining Success:
The restructuring process under insolvency laws can help a company to better align with current business needs. To improve the current system with environmental degradation, it is crucial to move beyond financial metrics to include environmental and social impacts and balance creditor interests with long-term community and ecological well-being.
Emerging Trends in Green Insolvency:
There has been a growing focus on sustainable corporate governance during insolvency proceedings and the adoption of eco-friendly business models post-restructuring.
The Role of the IBC in Promoting Sustainability
Current Framework: The Insolvency and Bankruptcy Code, 2016 (IBC) plays a vital role in providing a legal framework for resolving and restructuring financial distressed companies. The IBC primarily addresses financial restructuring with a limited focus on sustainability. Under the IBC, environmental authorities are treated as operational creditors, but the process of claims does not directly apply to the insolvency process. However, the impact of environmental degradation for business and the economy is not sufficiently addressed in the current system.
Opportunities for Reform:
Environmental, Social, and Governance (ESG) factors in the resolution process include the potential environmental impacts of the resolution, the effect on the stakeholders such as employees and communities, and the transparency and fairness of the decision-making process. It is important to integrate ESG metrics to ensure that all parties are treated equitably and that the loss due to environmental degradation does not increase. Reforms should be introduced to encourage resolution applicants to include sustainable practices in their proposals.
Green Insolvency: Key Principles
Green insolvency assesses and mitigates environmental risks and aligns restructuring outcomes with sustainability goals by defining, environmental accountability, social responsibility, and the long-term viability of companies:
Environmental Accountability:
Under the IBC, environmental accountability states that the company must still address its environmental liabilities during insolvency, including pollution clean-up and compensation for damage caused to the environment. Although it has not been specifically mentioned, companies undergoing restructuring must address existing environmental violations and incentivize eco-friendly technologies and sustainable operational models.
Social Responsibility:
During insolvency, companies need to safeguard employee welfare and community interests during restructuring. They should avoid decisions that disproportionately impact vulnerable stakeholders.
Long-Term Viability:
Green insolvency essentially focuses on sustainable growth post-restructuring rather than short-term recovery. A company undergoing insolvency proceedings will not only aim to be restructured financially but also to operate sustainably in the long run by prioritising environmental considerations.
Comparative Insights: Global Practices
The United Kingdom:
The UK’s approach to green insolvency focuses on integrating sustainability considerations into existing insolvency procedures, aiming to prioritse the environmental impact of a company during insolvency or liquidation. Hence, the UK places more emphasis on incorporating ESG compliance into the existing insolvency frameworks. One example of this is how insolvency practitioners are required to consider climate risks.
Lessons from the EU:
The European Green Deal is a set of policies and initiatives that aim to make the European Union carbon neutral by 2050. It promotes sustainable corporate restructuring policies by proposing mandatory ESG disclosures during insolvency proceedings.
India’s Potential:
The IBC enhances legal certainty and transparency, which are paramount for attracting foreign investment. To implement green insolvency, it becomes important to align the IBC with international sustainability norms to attract global investors.
Challenges in Implementing Sustainability in Insolvency
Implementing sustainability in the insolvency framework in India has many challenges, mainly a lack of legal clarity, resistance from stakeholders, and resource constraints:
Lack of Legal Clarity:
Due to the absence of explicit provisions for sustainability in the IBC and ambiguity around prioritizing environmental claims over financial creditors, there have been difficulties in implementing green insolvency.
Resistance from Stakeholders:
Creditors may be reluctant to accept lower returns for sustainability goals. Resolution professionals have the responsibility to balance the interests of all stakeholders and inform them of any possible outcomes. However, in the case of green insolvency, resolution professionals have limited knowledge of green practices.
Resource Constraints:
There are high costs associated with sustainable restructuring plans, therefore not a viable option for stakeholders seeking to recover their dues from companies. Hence, there is a need for government incentives to promote green insolvency.
Practical Tips for Insolvency Professionals
Insolvency professionals seeking to integrate green insolvency practices should prioritise environmental considerations throughout the insolvency process by assessing the debtor’s environmental liabilities. They should explore sustainable restructuring options to address the interests of all stakeholders. It is also recommended for insolvency professionals to engage creditors, employees, and community groups to build consensus around green restructuring.
Conclusion
Sustainability is no longer optional in corporate restructuring. By adopting green insolvency principles, India can align its insolvency practices with global standards. The IBC signifies an important step towards addressing the intertwined challenges of financial distress and environmental sustainability. Including environmental considerations into insolvency and restructuring processes, introduces a greener and more socially responsible future. However, it is crucial to address the complexities surrounding environmental claims and strike a balance between financial recovery and environmental responsibility.
Frequently Asked Questions (FAQs)
1. What is green insolvency?
Green insolvency entails integrating environmental considerations and sustainable principles into the processes of insolvency and restructuring.
2. How can the IBC promote sustainability?
The IBC can promote sustainability by incorporating ESG factors into the corporate restructuring process, prioritising environmental claims during insolvency proceedings.
3. Are there examples of sustainable corporate restructuring in India?
Yes, there are examples of sustainable corporate restructuring in India. For instance, ITC Limited implemented a comprehensive sustainability strategy including renewable energy projects, watershed management, etc, showcasing a holistic approach to sustainability across its operations. Tata Consultancy Services (TCS) has integrated green building practices, energy efficiency measures, and social initiatives, demonstrating a commitment to ESG.