ITC SUSTAINABILITY REPORT 2016 GRI - G4 COMPLIANT, IN ACCORDANCE - COMPREHENSIVE

In line with the Company's Board approved policy on stakeholder engagement, ITC has a structured framework to engage with stakeholders and address their key concerns. The framework is based upon established long term relationships with key stakeholders such as shareholders, farmers, customers, suppliers, employees, local communities, regulatory bodies and the media. With the firm belief that stakeholder engagement is an integral part of enriching and enduring partnerships, ITC has institutionalised these processes grounded on transparency and accountability.

ITC's Process of Stakeholder Engagement

Prioritisation and Addressal of Key Concerns

The sensitivity of an issue to a stakeholder and to ITC, in terms of high/ medium/ low importance forms the basis of the materiality analysis which in turn leads to identification of material aspects, definition of management approach and specific action plans for addressal.

Please refer to the Materiality Analysis section for further details on ITC's response to key stakeholders' concerns.

Insights into Local Community Needs

Since ITC's holistic development approach demands an intensive and deep level of engagement, it was necessary to identify and delineate core areas of in the catchments of our agri-businesses and factories. Based on parameters relevant to businesses and development indicators, current project areas were divided into core and non-core villages and clusters. Based on above filters, a total of 103 core clusters were demarcated comprising 902 villages/wards in 35 districts, which would form the nucleus of social investments in the coming five years.

The most powerful dynamic driving ITC's Social Investment Programme is the fact that each one is anchored in direct community participation and rooted in choices made and shaped by them. The identification and demarcation of core project areas was therefore followed by an exhaustive stakeholder engagement process to elicit their felt needs and aspirations to gauge the extent to which the current set of interventions were valued by the communities and evaluate if any course correction was required.

A total of 483 Participatory Rural Appraisals (PRA) were conducted covering more than half of the total core villages/habitations. Since PRAs are public meetings where the voices of marginalized communities and groups may not be heard, care was taken that separate PRAs were conducted with women and SC/ST households.

The table gives an overview of the topmost priorities identified by our stakeholder communities from across all geographies. An aggregation such as this obviously flattens variations between regions and social groups. But it nevertheless is indicative of some of the foremost concerns troubling households in our core catchment areas.

It is interesting to note that even though a large proportion of households in the core areas are from rural regions, only two of the top ten requirements relate to agriculture (highlighted in green). The balance eight reflect a strong desire to lead a better quality of life today (shown in brown) or aspirations for their children (indicated in blue). While people aspire for an improvement in the quality of life today, they are equally concerned that their children grow into a healthy, educated and skilled resource with the capabilities to compete in the employment markets of tomorrow. With respect to implications for ITC, it is worth noting that barring public infrastructure works, our projects currently cover 6 of the 10 needs listed above.

Sustainability Risk Portfolio

As a diversified enterprise, ITC continues to focus on a system-based approach to business risk management. The Corporate Risk Management Cell, through focused interactions with businesses, facilitates the identification and prioritisation of strategic and operational risks, development of appropriate mitigation strategies and conducts periodic reviews of the progress on the management of identified risks. The annual planning exercise requires all businesses to clearly identify their top risks and set out a mitigation plan with agreed timelines and accountability. The senior management of the Company also periodically review the risk management framework to keep it contemporary and relevant so as to effectively address the emerging challenges in a dynamic business environment.

Based on the ongoing risk assessments at Businesses level and aggregated at the organisation level, ITC has classified its sustainability challenges into two broad categories - those that are influenced by global events, and challenges that are unique to India.

Global Challenges

According to the World Economic Forum (WEF) Report on Global Risks 2016, large-scale migration, extreme weather events, climate-change, interstate conflict with regional consequences, water crises and volatility in energy prices are amongst the top risks that plague the world today.

Socio- Economic Risks

Some of these top most risks that endanger the world today are short term and arise as a direct outcome of human action, including interstate conflicts, collapse of states, governance deficits, large-scale terrorist attacks and migration. In 2015, Europe witnessed rising number of refugees and migrants seeking asylums in the European Union, from Middle East, Africa, South Asia and the Western Balkans, fleeing war and persecution, poverty and lack of employment in their home countries.

In addition to high refugee crisis, stability within the European Union is further threatened by stagnating economies and growth of far-right political parties. Other factors such as extreme energy price volatility will further aggravate these stresses.

In addition, the world today faces the growing concern of unemployment and underemployment contributing to rising socio-economic inequality. This is reflected in the fact that more than 45% of the global household wealth is owned by less than 1% of the world's adult population¹

Food crises is another challenge that threatens the world today. While enough food is available for everyone on the planet, still 795 million people go to bed hungry every day as it is estimated1 that thirty to fifty percent of all food produced gets wasted due to inadequate storage and transportation facilities.

Environmental Risks

The list for long term global risks is dominated by those related to physical and environmental issues such as climate change and water security. The world will not be able to meet the sustainable development challenges of the 21st century - human development, livable cities, food security and energy security - without improving management of water resources and ensuring reliable access to water. Population and economic growth have placed unprecedented pressures on water. As per a World Bank Report, with current practices the world will face a 40% shortfall between forecast demand and available supply of water by 2030. The potential for climate change to exacerbate water crisis with impacts including conflicts and forced migration has been highlighted in the WEF Global Risk Report 2016.

Global risks transcend borders and spheres of influence, which require all stakeholders to work together. The anticipated and real impacts for the above issues amongst developed and developing countries are however vastly different, both in scale and scope. These differences are multi-layered and multi-faceted given the dimensions of the challenges and the socio-economic context in different countries. Countries like India while cognizing for the larger global challenges, will have to shape their own sustainability agenda with focus on specific issues that have an immediate and direct impact on the Indian society at large.

The Indian Context

While India echoes many of the global challenges, issues like poverty, social inequities, unemployment, environmental degradation, water and food crises assume even more critical and multi-dimensional characteristics in India. Land pressure for instance, assumes greater significance in India which is home to 18% of the world's population, with only 2.3% of the world's land share.

Nexus of Social and Environmental Issues

India Inc. is faced with serious challenges due to water crisis. While agriculture accounts for around three quarters of all water used in India, rapid urbanization and increasing demand from commercial and industrial users have placed undue stress on already fragile water resources. According to the World Resources Institute estimate², the national supply of water is expected to fall 50 percent below demand by 2030. Despite substantial rise in demand, India's water supply remains constrained owing to inefficient use of water, over exploitation of ground water reserves without adequate recharge and variations in surface water availability because of erratic rainfall patterns.

Agriculture and allied activities remain the major source of livelihood for nearly half of the Indian population. The share of agriculture in employment was 48.9 per cent of the workforce, while its share in the Gross Domestic Product (GDP) was 17.4 per cent in 2014-15³.

However, deteriorating natural resource base, disconnected value chains, fragmented and small-size landholdings, weak infrastructure, inadequate knowledge and multiple intermediaries are main reasons for low income among the average farmers. Furthermore, around 55% of India's total sown area meets its requirements from rainwater alone. This assumes importance in the face of climate change related challenges of erratic rainfall leading to drought and floods. A majority of the farmers are hence trapped in a vicious cycle of low productivity. Therefore there is a need to address these challenges by ensuring farming population's sustainable access to water, knowledge and other necessary resources, whilst simultaneously improving the productivity resulting in better income realization. The surplus workforce from the agriculture sector can be provided with adequate skill training to enable them to join the manufacturing sector strengthening the Government of India's "Make in India" campaign.

Climate Change

With the United Nations Climate Change Conference of Parties-21 held in Paris (December'2015), a change in the global climate change politics is round the corner. India has submitted its intended nationally determined contribution (INDC) to United Nations Framework Convention on Climate Change (UNFCCC) stating its aim to cut its greenhouse gas emissions per unit of gross domestic product by 33 to 35 per cent by 2030 compared to 2005 levels. This in turn would imply specific targets for progressive reduction in GHG emissions intensity for the various industrial sectors of India. As sector specific targets would become a reality sooner or later, Indian industries need to revisit their individual GHG contribution with representative projection till 2030 and adopt a low carbon growth trajectory. In addition, Indian industry sector would also face the significant challenges due to price volatility in the global energy market, which may hamper investments into the renewable energy projects.

Social Infrastructure

As a growing economy, India has to deal with the problems of rapid and unplanned urbanization. Increasing population, higher consumption levels and inadequate infrastructure are putting a severe strain on the ecology. A large amount of waste being generated today ends up in landfills, leading to serious concerns of public health and sanitation risks as well as large scale environmental degradation. Negative impacts of urbanization are also manifest in the pollution of almost all Indian rivers that have been absorbing domestic and industrial sewage and agricultural wastes over the last few decades. Apart from posing a serious health problem to millions of people that continue to depend on polluted water from rivers, this also endangers the biodiversity dependent on it. It is therefore the need of the hour for the country to invest in basic infrastructure. This will further require enormous resources that can only be generated with a larger focus on livelihood creation and widening of the tax base.

In the light of rapid urbanization, road safety has also emerged to be a growing and alarming national concern. Over the years, the significant growth of vehicles on Indian roads has been the leading cause of accidents resulting into deaths, disabilities and hospitalizations with severe socio-economic costs across the country. According to a report by the Transport Research Wing of Ministry of Road Transport and Highways, Government of India, during the year 2014, there were around 4.89 lakhs road accidents with about 1.4 lakh fatalities and injuring more than 4.93 lakh persons in India. Such numbers strongly indicate not only the need for improving the emergency medical aid and road infrastructures but also the need to spread mass awareness on behavioral safety.

¹ The Global Opportunities Network Report 2015
² Source: Charting our water future, Water Resources group, 2009
³ Source : Economic survey 2016-17

ITC Context

ITC's operations and markets are India centric and the Company's world-class Indian brands ensure that larger value is created, captured and retained in the country for national development and growth. Therefore the organisation's sustainability is closely driven by the country's advantages and vulnerabilities. In line with the risks and opportunities that may impact India's economic, social and environmental sustainability, ITC has mapped the key challenges, risks and opportunities likely to impact its own long-term prospects and those of its stakeholders.

ITC's Materiality matrix enabled the design of the content of this Report so as to provide a reasonable and balanced picture of the organisation's Triple Bottom Line impacts and its performance. ITC's materiality analysis is based upon the following three pronged approach.

The matrix above depicts the material aspects based on their influence and significance on stakeholders' perception and ITC's impacts. The categorization under low, medium & high demonstrates the relative importance of aspects and does not necessarily depict that a particular aspect rated as 'low' has low impact or relevance.