PHYSICAL RISK ANALYSIS

As part of our physical risk assessment approach, we focussed on analysing acute risks arising from extreme weather events and chronic risks resulting from long-term changes in climate patterns for our all-eight-paint manufacturing locations in India. The risks were analysed over short-term (2030) and long-term (2050), using IPCC Representative Concentration Pathways – RCP 4.5 (moderate climate change scenario) & RCP 8.5 (high climate change scenario).

To prioritise the risks, a composite rating was calculated based on the likelihood and impact of the risks considering RCP 4.5 as probable scenario and short-term (2030) time horizon to facilitate effective decision-making. Along with scenario analysis findings, historical events and the probable impact of the risks were also considered for likelihood and impact scores. The figure below depicts the Risk Rating methodology:

For all the locations assessed, we are generally at low to medium risk for adverse impacts resulting from flood, wherein a couple of our units have medium to high-risk exposure from the cyclone. India being a tropical country, plant locations are evenly distributed between low to medium risks and high to very high risks exposure to heat wave-related adverse impact.

One of the locations is expected to be at high risk in terms of drought, a couple of them at high risk and the rest all at Medium or Low risk. However, our sites in India are assessed on water stress risk in line with guidance from Central Ground Water Board (‘CGWB’) groundwater block classification as recommended by SEBI under BRSR disclosure. As of 31st March 2023, none of our manufacturing plants falls under the water stress area. Assessing the water risk in a region is a step in the broader corporate decision-making process, which also includes decisions about the setting up of new units.

Acute Physical Risk:

Asian Paints has its operations distributed across the country and each geographical location of presence offers different weather conditions. The increasing frequency of extreme weather events will pose a risk to our operations and impact our ability to meet customer demands, and hence loss of sales. Similarly, any adverse impact on key suppliers may also result in our manufacturing, distribution, and sales.

In the past, we have not yet faced adverse climate events at any of our manufacturing locations which has resulted in a significant impact on operations. Natural disasters such as floods and cyclones in multiple geographies in the country have resulted in challenges related to distribution and sales. In the event of adverse weather conditions or natural disasters, we focus on the effective rearrangement of our resources and finding appropriate alternate solutions.

Water is an important natural resource consumed in paint manufacturing as part of our formulations. There are growing concerns on scarcity of water in various parts of the country. In this regard, we have been putting focussed efforts into reducing the nonprocess water consumption in our factories as well as utilising rainwater harvested within our premises. We have engaged with nearby communities and have worked together for water harvesting and recharge initiatives, improving the water availability throughout the year in such communities. All our efforts around water have been discussed in detail in the environmental section of this report.

Chronic Physical Risk:

The events resulting from a change in climate pattern will have an impact on our operations. Our manufacturing locations are well distributed throughout the country. Going forward, building resilience to these risks on the man, machine and material/ process front shall be made. While developing our business strategies, we will continue to put a strong emphasis on the physical risk that has been recognised, with water stress being the main long-term concern.

Summary of physical risk and resilience measures:

1. Carbon market and obligations related to emissions (emerging)

Risk Description: India’s carbon trading framework is being developed and the regulatory authority is expected to come up with a voluntary carbon market framework in the near future. It will evolve into a cap-and-trade mechanism in the next 2-3 years with a sector-specific carbon budget. There is a probability of obligations being made applicable to Asian Paints. Additionally, with India’s commitment to becoming net zero by 2070, there is likely to be expectations from industries to transition to cleaner energy.

Likelihood & Time Horizon: Likely in Medium-term

Resilience Measures: We have achieved a 74% reduction in Specific scope 1 and scope 2 emissions from FY 2013-14 baseline through:

• Sustained efforts in increasing the share of RE in our energy mix, with a 62.2% contribution to our electricity consumption in 2022-23

• Efforts in energy efficiency resulting in a decline in specific power consumption by 36% from the 2013-14 baseline

We target to reduce specific emissions by 75% and 80% by 2025 and 2030 respectively. With a high share of renewable energy and other emission reduction measures, we expect a reduced emission obligation for Asian Paints. Further, we shall participate in policy consultations to understand the impact of carbon markets on the Company.

2. Risk Type: Exposure to Litigation (legal)

Risk Description: : The environment-related regulatory landscape is continuously evolving. The speed and extent of changes in the regulatory landscape are expected to continue even in the future. Not being able to meet the compliance requirement may result in the Company’s exposure to litigation.

Likelihood & Time Horizon: Likely in short-term.

Resilience Measures: : We are committed to adhering to all laws and regulations in letter and spirit. We have a robust process for scanning and timely implementation of new legislations and amendments. We stay abreast with emerging regulations. This is illustrated by our compliance readiness with PWM rules and their amendments. We have been doing EPR for our plastic packaging as the brand owner for the last 5 financial years. We have been doing 100% EPR against our Flexible & MLP liability way before it was mandatory. We successfully eliminated Lead from all our architectural paints in 2008 which became a regulatory requirement nearly a decade later in 2017.

1.Changing Customer behaviour

Risk Description: Consumers shall make more informed purchasing decisions which may lead to a shift in consumer preferences towards products with an eco-label, lower life cycle carbon footprint, low VOC and bio-based or natural paints

Likelihood & Time Horizon: Likely in Medium-Term.

Resilience Measures: Product Stewardship agenda to advance the development of Sustainable products is well entrenched as part of ESG commitments. We have a healthy product portfolio of Sustainable products in the form of:
• 30 Green Assure low-VOC products, out of which 3 are Green Seal certified

• Royale Health Shield, anti-bacterial paint that also improves indoor air quality

• Nilaya Naturals’ first-of-its-kind paint with more than 90% natural ingredients

• SmartCare Damp Proof range of waterproofing products that provide surface temperature reduction

• 22 products having durability of 5 years or higher

Further, backward integration to manufacture Vinyl Acetate Ethylene Emulsion (VAE), which is a low carbon footprint alternative is a strong direction in making our products more sustainable.

2. Increased Cost of raw materials

Risk Description: : To reduce the impact of global warming, countries have taken net zero commitments, which may have a possible impact on the cost of crude oil, which in turn may impact the cost of raw materials for the paint industry (Solvents, Monomers and TiO2 ), which are derived from petrochemical feedstocks and further will impact the production costs of paints and coatings.

Likelihood & Time Horizon: Possible in Medium-Term.

Resilience Measures:: We focus on formulation optimisation and efficiency to reduce the overall carbon footprint of the products being carried out such as improving the scattering efficiency of the rutile. In FY 2022-23, we used 6.4% renewable or bio-based raw materials by volume with a target of increasing the same by 20% and 30% in 2025 and 2030 respectively from the FY 2020-21 baseline year.

1.Increased stakeholder concern or negative stakeholder feedback

Risk Description: There is growing awareness about the impact of climate change and the role that businesses play in contributing to it. Many stakeholders, including investors, customers, and employees, are increasingly concerned about the organisation’s environmental impact and its efforts to address climate change. Companies that fail to commit to disclose the climate-related targets or fail to meet them may face negative feedback or concerns from stakeholders.

Likelihood & Time Horizon: Very Likely in Short-term.

Resilience Measures:: We have been disclosing emission reduction year-on-year progress in the public domain for the last 10 years with external assurance of relevant indicators. This year, we have disclosed our 2025 and 2030 promises for scope 1 and scope 2 emission intensity reduction. Further, this year, we have completed and disclosed scope 3 emissions. Along with Integrated Report and Sustainability Report, we have also been disclosing to CDP climate change.

1. Costs to transition to lower emissions technology.

Risk Description: : Regulatory or stakeholder pressure is forcing organisations to reduce negative impact on the environment, which includes replacing old machines with lower emissions technologies which brings in additional cost.

Likelihood & Time Horizon: Likely in Short-term.

Resilience Measures: All our future investment decisions, factors in prevalent and expected regulatory guidelines and policy changes and we focus on adoption of best available technologies (BAT) from environmental stewardship.