ETCFO in a Q&A with TK Sridhar, Chief Financial Officer, ABB India includes its strategy on “transformation topics” such as staying relevant in the market, the evolution of enterprise risk management and environmental, social and governance (ESG).
“If you look at it (ESG initiatives) as a cost, we will always worry about it. But what we need is a change of mindset and to see it as an investment that will actually help the organization and customers. Then comes the payback period, which makes it more meaningful,” Sridhar shared in the conversation about the cost of going the ESG path. The edited excerpts.
Q: As a CFO, what keeps you up at night?
TK Sridhar: Processing topics. It’s important for CFOs to know how to manage transformations and portfolio management as business models evolve. How to requalify and resize your employees to adapt to these transformations.
Managing risk, cash and everything is now becoming routine, but the topics of transformation are emerging now. So how should CFOs play a role in this?
Q: After Covid, how do you see enterprise risk management (ERM) evolving?
TK Sridhar: ERM is a bottom-up approach for us. ABB’s ERM journey has matured over the past decade. The ERM exercise will start soon, as we follow the calendar year – January to December as the financial year. So we are looking at the risk from now for next year. So we are reassessing where we started from, where we are today, and looking forward to where we are going.
As a multinational organization, companies fall under a global organization. Typically, risk profiling is done by keeping a risk register, assessing the impact of each risk.
The top ten risks are listed and ready to be managed. However, risk profiling divides risks into two. For example, technology risks are managed by the global business, while risks such as people, governance, inflation are managed by the Indian business. This distinction keeps the framework stable when running the business.
Over the past decade, this framework has remained consistent. Alongside, internal controls are also designed to manage these particular risks. It can’t just be a box-ticking exercise, but it needs to be pervasive to address other parts of operations as well. This is how we sew this particular subject and other operating elements.
As governance is concerned, previously the risk management committee met once a year, but now we meet twice a year. Independent directors should be assessed on these particular business risk portfolios. The chairman of the audit committee is definitely the chairman of that particular committee as well as so as to leverage the wealth of knowledge that independent directors have in the business to manage any particular risk.~
Q: Are you happy with your ERM? How would you modify it?
TK Sridhar:: I am satisfied with this exercise. The evolution of risk over the years has changed. Previously, the safety of people was a major risk. But actions have been taken and added to our DNA. Now that market risks are changing, how do we stay relevant in the market? For example, as technology evolves, as a digital organization awareness, adaptation to technologies and our offerings with customer connection are important.
What would I modify? The changes to ERM as an exercise differ at each level of the business organization. It’s important to educate people on this particular topic: how to use ERM as a tool for managing their business. It also depends on the maturity of the people.
CFOs need to act as facilitators for this to happen, as the perception of risk would be different at different levels. More training needs to be given at each level of the organization to understand the range of risks.~
Q: How do you manage these currency, fuel and commodity price volatilities? What is your strategy as a company with diversified portfolios and operating around the world?
TK Sridhar:: ABB operates in dimensions: firstly, we manufacture around 85% of our products for local markets, and 15% go out of India for export markets.
The next dimension is our offerings: products account for almost 70%. This has a shorter manufacturing cycle unlike the old ABB which had a project-intensive organization. It also means that our risk is mitigated faster; Services are around 15% to 16%; Projects represent about 12% to 15%.
Above all, ABB follows a very strong principle of gross hedging. This means that each company is responsible for managing its profitability on its own shoulders. And therefore, it’s gross coverage that’s happening throughout the organization, isn’t it. This ensures that every business takes care or takes responsibility for managing its profitability.
The first thing is that we hedge commodities based on forecasting techniques. This means that the price at which we bid for the order or offered a solution to the customer remains intact. The margin we expect is intact. For forex, to hedge this operation, we manage it as a gross hedge.~
ABB India’s strategic direction, being a net importer, is that the more you export, the more natural cover you have that creeps into the organization. We are able to remain stable in the face of this volatility. The history of exports in the past three years, since 2018 after we handed over the power grids to Hitachi, there has been substantial growth in exports. Even if I look at the previous quarter, when registered orders were up 44%, even exports were up 44%. you just know that by design, because our focus on exports remains unchanged.
Strategically, we need to improve our equation between the domestic market and exports, and grow at a faster rate on exports. So that creates a natural hedge while, transactionally, you have your controls in place on how you manage that volatility, those commodities, and that forex.
Also read: ABB India growing by double digits, wants to maintain momentum: CFO
Q: Another transformation topic concerns ESG. We all know that ABB has a 10 point program for ESG. But what is your cost-benefit analysis when we execute ESG initiatives? Is there a cost to following the ESG path?
TK Sridhar:: As part of our green infrastructure and green manufacturing initiatives, we have many projects on renewable energy, water positivity and rainwater harvesting, etc. . Instead of viewing these items as a cost, it’s helpful to think of them as business enablers, as each item has an element of further optimization and savings. What we need is a change of mindset and seeing it as an investment that will actually help the organization and the customers. Once we change the way we look at things, the returns on investment established for each element make it more meaningful and a value-added activity for us and our stakeholders.
We need to apply the right mindset shift to ESG as a subject. There are two schools of thought – cost prohibitive and cost accretive to margins. I think ESG is important for us to be relevant in the coming years in the market. This can be a competitive advantage over time. When the transition occurs in these particular areas, which is better for the planet, people and productivity, we have to adapt and move forward. The cost of what we do to follow these principles is quite minimal, but the returns across the entire value chain are significant.
ESG is a key differentiator for companies like ours in terms of how we can create more customer delight, a unique experience, securing internal operations and the outcome of those operations to serve them. This is not only in the context of cost savings or productivity, but also to ensure that we are able to meet the ESG agenda of clients. ESG is a path where the whole ecosystem travels and evolves together.
There are three compartments under the 10 ESG principles. Green buildings, green factory and green products. Business activities are centered around these, of course, beyond the sustainable offerings in our portfolio.
Example: Our national, commercial and corporate offices are located in a LEED Gold certified building at our campus in Peenya, Bangalore. The building is essentially a repurposed building that has been recycled and made AI-compatible. The thing to note is that a recycled building will send a lot less material to a landfill, require less material, which otherwise would have been a lot more. Not only that, but now this recycled building saves about 30% energy thanks to our advanced technology for building management systems. The return on investment is approximately two and a half years. Good for the planet, more productive and good for people.