ESG Workshop
ESG Workshop
ESG Workshop
3. Case studies
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DEFINITIONS CSR
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COMPONENTS OF E,S,G
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E N V I R O N M E N TA L FA C T O R S
1. Climate Change
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E N V I R O N M E N TA L D I S C L O S U R E S & M E T R I C E S
a. Energy consumption
• GHG emissions,
level of absolute emissions of GHGs
• Air quality, b. Water Utilisation
• Energy management, costs generated by water usage efficiency
• Water and wastewater management, in operations
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G L O B A L WA R M I N G – R I S E I N E A R T H T E M P D U E T O G H G
2011 7
41
1999 6
35
1987 5
1975 4
1960 3
16
1927 2
8
1804 1
4
Carbon neutrality and Net Zero - While both address the same issue of harmful atmospheric emissions, net zero is a broader term
than carbon neutrality, and has a longer time horizon than carbon neutrality.
Carbon neutrality implies that a company will reduce CO2 from the atmosphere that is equivalent to the amount of CO2 that it
has emitted and covers only direct emissions (Scope 1 & 2) for the company or a specific product or service.
Net zero refers to the actions taken to remove GHG emissions from the atmosphere that is equivalent to the quantum of GHG that it
has created and seeks to take out an equivalent amount of GHG from the atmosphere. Net zero includes the company and its entire
value chain, and includes direct and indirect emissions (Scope 1, 2 and 3). This is aligned with the goal towards 1.5⁰C.
1. Carbon neutrality – must offset x tonnes of CO2 emissions, either by creating carbon sinks like afforestation and / or by buying
carbon credits. If a company can obtain sufficient carbon credits and take up environment positive activities that offsets the entire x
tonnes of CO2 emission, it is deemed to be carbon neutral.
2. Net zero – must remove the x tonnes of GHG emissions through technology (carbon removal / carbon capture and storage) and /
or natural means (forest cover creation, etc), and any residual amount can be neutralized with carbon removal credits.
India has a goal of becoming net zero by 2070, world by 2050, China by 2060
4. Reduction of the carbon intensity of the economy by 45 per cent by 2030, over 2005 levels.
5. Achieving the target of net zero emissions by 2070.
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K E Y S O C I A L E V E N T S T H AT I M PA C T S TA K E H O L D E R S
• Globalisation (outsourcing),
• Urbanisation & mass migration,
• Income inequality,
• Automation & AI,
• Digital technology,
• Changing demographics and lifestyle,
• Climate change,
• Water scarcity.
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I M PA C T O F S O C I A L FA C T O R S O N S TA K E H O L D E R S
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I M PA C T O F S O C I A L FA C T O R S O N T H E C O M PA N Y
a. Occupational health and safety issues (accident and fatalities), which can result in huge fines and
liabilities;
b. Human capital management issues, which can lead to greater operating costs if new employees need
to be trained due to high employee turnover;
c. Supply chain issues, which can impact brand reputation and revenues if consumers choose to
boycott certain products;
e. Poor working conditions, which can result in issues with product safety.
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G O V E R N A N C E FA C T O R S
Corporate governance is the process and structure for overseeing the business and management
of a company.
• From the Latin word for the steering of a boat, gubernare, governance incorporates that
sense of guiding and controlling
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I S S U E S I N V O LV E D I N G O V E R N A N C E FA C T O R S
• Shareholder rights
• Effectiveness of leader
• Executive pay
• Audit practices
• Board independence and expertise
• Transparency and accountability
• Related party transactions
• Dual class share structures
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BOARD COMPOSI TI ON I N I N DI A
Section 149 of the Companies Act, 2013 requires that every company shall have a minimum number of
3 directors in the case of a public company, 2 directors in the case of a private company, and 1 director
in the case of a One Person Company.
At least one woman director shall be appointed in every listed company (from 2014 onwards)
All listed companies to have at least 1/3rd of total directors as Independent Directors
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BOARD COMMI T TEE
• Audit Committee – at least 3 members, with 2/3rd being ID; Chairperson shall be ID
Oversees financial reporting and the audit
• Nomination & Remuneration Committee – at least 3 members, with half being ID
Seeks to deliver a proper alignment of interests through executive pay
• Stakeholders Relationship Committee – chairperson to be a non-executive director
• Look into the mechanism of Redressal of grievances of shareholders, debenture holders
and other security holders
• Risk Management Committee
• Along with directors, senior company personnel to be members of the Committee
• CSR Committee
• For companies where CSR activities are being undertaken
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C O R P O R AT E M I S S T E P S … ( 1 )
• ENRON– largest seller of natural gas in US in 1992, m-cap $60bn in 2000, revenue of $50bn in Jul-01
Declared bankruptcy in Nov-01 – accounting fraud, poor financial reporting, hid losses, CEO compensation
• Led to dissolution of Arthur Anderson (auditor)
• Sarbanes-Oxley Act, 2002 – laid down audit standards
• HIH Insurance, Australia – $8bn in assets, largest collapse in Australia, went into liquidation (2001)
Fraud – stock price manipulation, dissemination of incorrect information, dishonesty
• TYCO– security systems company, senior mgmt. unable to explain $600mn usage of company funds (2002)
• Illegal financial transactions by CEO, co-mingling of assets, tax fraud, improper audit, $150mn compensation
• WorldCom – largest long-distance telephony company is USA; fraud estimated at $79.5bn; declared fraud in 2002
• Used questionable accounting practices to inflate profitability
• Ahold – Dutch MNC retail company; criminal investigations by Dutch & US law enforcement, 2004; paid fines EUR8mn
• Accounting irregularities in subsidiaries and JVs.
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C O R P O R AT E M I S S T E P S … ( 2 )
• Parmalat– Italian diary giant – 35,000 employees and EUR6bn sales, Europe’s biggest fraud, filed for bankruptcy in 2003
Overstated sales and profit for more than a decade; debt much higher than reported and bank account did not have the
amount that the company had declared as the balance
• Olympus– optical equipment manufacturer, Japan; sales of $10.6bn and 40,000 employees in 2011. Stock price nose-dived
after the allegations were made public, directors resigned and other restructuring
Irregular payments for acquisitions leading to asset impairment charges
• Volkswagen– cars recalled worldwide, company reported losses, paid fines of EUR1bn
• 11mn cars worldwide had been fitted with the defeat device / software – which could detect when it was being
tested and modify results –engines emitted 40times more than the permissible level of emissions
• Daily Mirror – English newspaper founded in 1903, declared bankruptcy in 1992, owner committed suicide - 1991
• Kept transferring money between group companies to show those were profitable, diverted money from the
pension fund account of Daily Mirror to prop up share price
• BCCI – Bank of Credit & Commerce International, UK – set up in 1972 and became 7 th largest private bank by 1982 – 400
branches in 78 countries and $20bn in assets – liquidated in 1991
• Money laundering, involvement in organized crimes
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S H O R T-T E R M I S M V S L O N G -T E R M I S M
“… overemphasize neither the short- Among the companies using ESG measures, 43% set human
nor the long-term. They realize it is not capital goals (such as diversity, employee engagement, and
a case of choosing one or the other; it’s a positive company culture); 25% set health, safety, or
about both. They push the environmental goals; and 32% use both types. Utilities and
organization to maximize near-term energy companies have the highest prevalence of ESG goals
performance, but they would never cut (81% and 77%, respectively), typically related to health,
investment to meet short-term safety, and the environment.
expectations.…”
Source: Milano, 2022 Source: HBR article, 2021
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M AT E R I A L I T Y A S S E S S M E N T S
• Where should investors start when implementing social factors in their investment
decision?
a. Identify social factors which are more financially material or significant
b. Identify and assess how companies are exposed to these identified social factors
c. Identify how companies are managing these risks
d. Identify critical social factors in the supply chain
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E X A M P L E S O F S E C T O R A L M AT E R I A L FA C T O R S
• Commercial banking
• Apparel, Accessories & Footwear • Data security
• Product quality & safety • Access and affordability
• Supply chain management – • Product design and lifecycle
environment & labour issues management
• Materials sourcing & efficiency – • Business ethics
sustainability in raw material sourcing • Systemic risk management
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S TA K E H O L D E R M A P P I N G & M AT E R I A L I T Y
ASSESSMENT – RELIANCE INDUSTRIES
https://www.ril.com/ar2022-23/understanding-the-material-issues.html
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AGENDA
3. Case studies
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DEMAND TRIGGERS
• Recent regulatory push is making ESG both a risk and opportunity for all entities
• Incorporation of ESG factors in credit risk models
• In addition to traditional factors of financial, business, industry and management, other
parameters like alternate data and ESG being incorporated
• Recent news item about SBI planning to do ESG profile of its 33 trillion borrowers
• Incorporation of ESG factors in portfolio construction (for investing)
• Issuance of green bonds
• ESG rating / grading of corporates
• Guidelines by GoI on BRSR reporting, Green credit, Carbon credit, Extended Producer Responsibility
• Cross-border trade tariff – Imposition of Carbon Border Tax by EU
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BOARD OVERSI G HT
• ESG committee at board level already exists in many places; might get mandated in future
• May be with CSR committee or stand-alone
• Done by MSCI, DJSI, Sustainalytics based on availability of public domain information - data
and policies.
• SEBI has come out with a guideline for ESG Rating Providers – can be subsidiary of a credit
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TA X O N O M Y O F E A N D S FA C T O R S F O R O I L A N D G A S
(BLOOMBERG)
Social factors
Environmental factors
Community rights & Community relations,
Air Quality Air emissions & its policies relations Human rights
Climate exposure Transition risk Ethics & compliance Business ethics,
Competitive behaviour,
Ecological impact Ecosystem protection, Legal & regulatory
Environmental incidents & fines management
Energy management Energy consumption, Purchased Labour & employment Training
electricity practices
GHG emissions management GHG emissions & its policies Occupational health & Fatalities, Health &
Hazardous waste management Hazardous waste generation & safety management safety policies, Safety
recycling incident rate
Wastewater management Wastewater management Operational risk Operational incidents
management & preparedness
Water management Water use and its policies
Source: Bloomberg
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M S C I A P P R O A C H A N D R AT I N G S F O R O I L & G A S
SECTOR
E/S/G Parameter Weightage
Environment (41%) Carbon emissions 14%
Bio-diversity & land use 14%
Sector – Energy;
Toxic emissions and waste 13%
Sub-sector –
Integrated Oil & Gas Social (26%) Community relations 13%
Health and safety 13%
Governance (33%) Governance 33%
Sinopec SourceMSCI
Aramco
Recent MSCI ratings
Hind Petroleum
of select companies
Indian Oil
Reliance Exxon Mobil ONGC
First issued in 2007 (2014-15 in India) and market has seen explosive growth.
Global market at $130 trillion, Indian issuances expected to be around $1 trillion in 2023.
Cumulative Indian issuances $43 bn from 2014-15 till 2021, with > $6bn in 2021
Almost 5000 green bonds issued till 2021 by Indian banks / issuers, 76% $ denominated, maturity typically < 10 years
(though exceptions are there)
Issued by Indian banks (Yes Bank, Axis Bank, SBI) and NBFCs (REC, IRFC) to fund their growing lending programme to
support India’s energy transition.
Indian issuers (Renew Power, Torrent Solargen, Azure Power, JSW Hydro, Adani Green, ACME Solar, etc) are also issuing these
to access global / Indian capital markets and fund their clean energy initiatives
Pre-issuance verification required for use of funds (typically KPMG, EY, etc)
Borrowing costs were typically higher than ‘normal’ bonds – situation is getting addressed.
• SEBI Circular of 12-Jul-23 – new compliance for top1000 NSE-listed companies starting FY25 for top250,
and then progressively moving to all
• Make ESG disclosures for 75% of supply chain on comply-or-explain basis
• Automated reporting platforms available in the market to report data as per different standards
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BRS R R EP ORT I N G
Alignment with SDG
•PRINCIPLE 1: Businesses should conduct and govern themselves with integrity, and
in a manner that is Ethical, Transparent and Accountable.
•PRINCIPLE 2: Businesses should provide goods and services in a manner that is
sustainable and safe.
•PRINCIPLE 3: Businesses should respect and promote the well-being of all
employees, including those in their value chains.
•PRINCIPLE 4: Businesses should respect the interests of and be responsive to all its
stakeholders.
•PRINCIPLE 5: Businesses should respect and promote human rights.
•PRINCIPLE 6: Businesses should respect and make efforts to protect and restore the
environment.
•PRINCIPLE 7: Businesses, when engaging in influencing public and regulatory policy,
should do so in a manner that is responsible and transparent.
•PRINCIPLE 8: Businesses should promote inclusive growth and equitable
development.
•PRINCIPLE 9: Businesses should engage with and provide value to their consumers
in a responsible manner.
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C R O S S B O R D E R T R A D E R I S K S F O R C O R P O R AT E S
18th April-23 – EU Parliament passed legislation for implementation of Carbon Border Adjustment Mechanism (CBAM)
• Will enable EU to impose a Carbon Border Tax on specific imports such as steel, aluminium, fertilizer, cement, electricity and
hydrogen from Jan-26. Inclusion of more sectors after 2026, and cover all by 2034
• Tax is equivalent to the fee imposed on EU producers who have to comply with EU’s Emission Trading System, and ensures
that non-EU producers do not enjoy an unfair advantage vis-à -vis EU producers
• From Oct-23 to Dec-25, reporting on carbon content of exports to EU to be declared by non-EU producers to EU importers
(both direct and indirect CO2 emissions)
Proposed methane regulations for oil and gas industry at draft stage in EU and USA
• Been at WIP stage for a while – no clarity on likely date of finalization
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E X T E N D E D P R O D U C E R R E S P O N S I B I L I T Y F O R C O R P O R AT E S
EPR responsibility under E-Waste (management) Rules, 2016 stipulates collection targets of E-Waste for
producers, whether be it in weight or number, which has risen from 30% in Year 1&2 to 70% in Year 7
• Implementation of EPR responsibility by producers either through the take-back system or by setting
up collection centres or both to channel the E-Waste to registered recyclers or dismantlers.
The Plastic Waste Management (Amendment) Rules, 2022, which provide guidelines for strengthening the circular
economy of plastic packaging waste as well as promoting alternatives to plastic.
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O P P O R T U N I T I E S F O R C O R P O R AT E S
28th Jun-23 Min of Power (MoP) notification – Carbon Credit Trading Scheme 2023
MoP based on recommendations of BEE & National Steering Committee on Indian Carbon Market will decide on list of
sectors and obligated entities who will be mandated to record and maintain the GHG emissions intensity data and attain
the targets
Those who over-achieve will receive certificates that can be sold to those who have under-achieved (1 carbon certificate
= 1 ton of CO2 equivalent) on a trading platform. Can sell overseas but need to first meet our NDC obligations.
26th Jun-23 Min of Environment, Forest & Climate change draft notification – Green Credit Programme
• Market based mechanism for providing incentives in the form of Green Credits to entities for positive environment actions –
for tree plantation, water conservation, reducing air pollution, sustainable building, etc. Can be traded on a domestic
platform. May also get carbon credits for the same activity under carbon market
• At the draft stage – details on benchmarks, etc awaited. To be finalized after consultations with industry / experts.
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G R E E N I N I T I AT I V E S – S E L E C T E X A M P L E S
MRPL
Criteria for green belt - Fast growing large evergreen canopy cover, large leaf index and resistance to pollutants and adaptable
to agro-geo climatic conditions, less water stress
Trees planted - Acasia, Bauhinia, Cashew, Casuarina, Eucalyptus, Glyricidia, Gulmohar, Hopia, Jackfruit, Mahagony, Mango,
Sonmohar, Rain tree, Soapnut, Spathodia, Tamarindus, Teak, Vetiria
Essar /Nayara (Vadinar refinery)
950 acres of green belt with 100 species of trees and drip irrigation. Employment to 300 local people and a natural
habitat for birds. Fresh water for plants and vegetables, treated water for trees.
Neem, Karanj, Sonmohar, Aus Babool, Cassid, Karanj, Tabubiya, Alstonia, Casurina, Bahumia, Ambali, Goras Ambli,
Areca palm, Champa, Drumstick, Gulmohar, Ashokpalav, Banyan, etc
20 species of fruit trees - Guava, Jamun, Pomegranate, Sapota, Fig, Dragon fruit, Apple, Custard Apple, Tamarind
Almond and 100,000 mango trees
30 seasonal vegetables, gardens of decorative flowers and medicinal plants
Tree wall of casurina around the belt to protect trees for harsh sea winds
175 hectares of mangrove plantation and increase to 275 hectares by 2025; 300,000 trees in green belt – increase by
25% by 2025
10MW solar plant to mitigate 20,000 tons of emissions / year (under construction)
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B E N E F I T S T O C O R P O R AT E S I N A D O P T I N G E S G
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AGENDA
1. ESG grading
2. Emerging regulations – BRSR, EU
3. Case studies
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C H O S E N C O M PA N I E S
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Source: public domain
S T E R L I T E C O P P E R - O V E RV I E W
Since its inception in 1996, Sterlite Copper has steadily grown to become one of the leading contributors to
copper production in India, contributing upto 36% of India’s demand for refined copper.
Currently, it operates a 400,000 Metric Tonnes Per Annum (MTPA) Copper Smelter with associated facilities such
as a Refinery and Copper Rod Plant, a Sulphuric Acid plant of more than 12,00,000 MTPA and a Phosphoric Acid
plant of 220,000 MTPA at Thoothukudi, Tamil Nadu.
• Sterline Copper also operates a 160 MW coal based power plant in Thoothukudi, Tamil Nadu.
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STERLITE COPPER – ESG ISSUES
1994 – TN Pollution Control Board gives NoC and company starts construction, despite protest from locals citing
environmental concerns. Company taken to court in 1996 over environmental clearances – licenses granted;
1997 – local villagers fall due to pollution
1998 – National body says that per rules plant should have been 25km from Gulf of Mannar, but actually 14km
1999 – 2001 – Complaints of gas leak and toxic waste released in water
2010 – 2013 – Lower courts order closure of plant due to pollution, gets go-ahead from higher courts, Rs 100 cr fine
2018 - Protest by local villagers and TNPCB refusing renewal of licenses, more than 12 local protestors killed in
police firing and plant closed
Apr-2023 – Supreme Court allowed plant to open for maintenance purposes
May-23 – Company sets up 32-acre biodiversity park at Thoothukudi
Pacific Gas and Electric Company, incorporated in California in 1905, is one of the largest combined natural gas and
electric energy companies in the United States
The company provides natural gas and electricity to 16 million people throughout a 70,000-square-mile service
area in northern and central California.
Investigations by the California Department of Forestry and Fire Protection assigned primary blame to the
company for two separate devastating wildfires in California – due to faulty equipment of PG&E. The formal finding
of liability led to losses in federal bankruptcy in January-19 , PG&E soon announced its filing for bankruptcy
Exited bankruptcy in Jun-20
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THERANOS
Article by Wall Street Journal and other academicians questioning company’s claim. Investigations followed and
company was dissolved in 2018
Founders jailed
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S AT YA M
India’s first corporate fraud – happened in 2010. At that time, Satyam was India’s 4 th largest IT company. Was a
pioneer in introducing internet in India – Sify, and was one of the first Indian companies to list on NASDAQ, 1999
The founder and directors of India-based outsourcing company Satyam Computer Services, falsified the
accounts, inflated the share price, and stole large sums from the company.
• Much of this was invested in property, MATYAS
The swindle was discovered in late 2008 when the Hyderabad property market collapsed, leaving a trail back to
Satyam. Chairman Raju confessed that the company's accounts had been falsified – embezzled Rs 7000 crore
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BYJU’S
Few red signals on the edtech company (source: news in public domain) –
• Headcount – 58,292 (May-22), 24,787 (May-23)
• Moved out of large rental properties in Bangalore
• Auditor and three directors have resigned
• Has problem of repayment of its term loan
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ASSIGNMENT
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ANNEXURE
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R E P O R T I N G S TA N D A R D S – N O S I N G L E B O D Y
Carbon Disclosure Project, 2000 set up by not-for-profit charity – runs the disclosure system for investors, companies, cities, etc
to manage environmental impacts
Global Reporting Initiative, 2000 & 2021 – in cooperation with UNGC launched sustainability reporting standards – used widely
Sustainability Accounting Standards Board, 2011 (SASB) – standards for 70+ industry categories with materiality maps.
Taskforce on Climate-related Financial Disclosures, 2015 – disclosure on Governance, Strategy, Risk, Metrices
Double materiality reporting, 2019 – introduced by EU on how climate impacts business and the way business impacts climate
International Sustainability Standards Board, 2021 – set up after COP26, Glasgow – merges SASB, TCFD, etc. Rolled out IFRS
Sustainability Disclosure Standards in Jun-23; if IFRS not available, then guidance is to use SASB
Corporate Sustainable Reporting Directive, effective 2024 - requires companies to disclose material sustainability metrics, set
targets and report progress. Third-party assurance becomes mandatory
SEC Climate Disclosure Proposal, US – WIP – disclose Scope 1 and 2, and also Scope 3 – if material targets have been set
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[email protected]
+91 9831097745
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