Shownotes

It's a new year, a new day and The Elephant in the Room podcast is ready with its first episode of 2022. My guest Dr Mukund Rajan is the Chairman of Ecube, an investment advisory focused on transforming the climate and ESG landscape in India. 

The focus of this freewheeling conversation in this episode is around ESG and Dr Rajan's latest book 'Outlast - how ESG can benefit your business' which he co-authored with Col Rajeev Kumar

We also spoke about the drivers for change including climate and environmental exigencies and changing stakeholder expectations👇🏾👇🏾👇🏾

👉🏾 Demystifying the jargon around ESG

👉🏾 The value of organisational 'Purpose' in the 'Age of responsibility'  

👉🏾 ESG as a transformation trend that will enable companies and countries to meet their development goals

👉🏾 Big issues that corporate India can champion in building a fairer workplace and society

👉🏾 ESG as a competitive advantage and a race to the top and those who are getting it right

👉🏾 Linking ESG performance to executive compensation

👉🏾 Preparing for internal and external disruptions

👉🏾 Can be put ESG in the driving seat to drive social impact and sustainability when funds are essentially driven by profits? 

Memorable passages from the podcast

👉🏾 Thank you. Thanks for having me. 

👉🏾 Well, the book itself is I think quite straightforward in terms of the partnerships. So HarperCollins published my previous book, The Brand Custodian, and they proposed the idea of a book on ESG, which was beginning to get a lot of currency in India. They jumped on it and said, they'd be happy to publish.

In fact, I understand this is the first book on ESG in India, that's come out. Colonel Rajiv Kumar was my colleague in the Tatas and when I was the brand custodian at Tatas, we both worked on a whole bunch of issues and also saw a number of ESG crises, up close and in person. So when he retired from the group, we had sort of made a mutual commitment that we'd write something together. And here we are I think almost two years after we made that pact and we've got a book out. 

👉🏾 The subject itself is one that, as I said, is gaining a lot of currency. But, in 2018 you know, I left the Tatas and I started my own firm called Ecube. And Ecube as a name suggests is drawn from three E's Engage and Empower for ESG. The whole idea of the firm was to really support the transition of corporate India towards better ESG performance. And critical drivers at the time that my co-founders and I saw were, obviously a lot of the focus in corporate governance, that was happening in India, but equally growing concerns about climate change as a major issue within the E of ESG. So we really thought the Indian market would be getting ready for much greater focus on ESG issues. And thanks to a lot of the research and the reading one was doing, it made sense to put all this in a book form and make it available to a wider audience.

👉🏾 So, the two go hand in hand Sudha. And you know, as I mentioned in the book, I sort of outlined the way in which this whole focus on corporate responsibility, on concerns around sustainable development has really been evolving over the last few decades. But certainly human kinds ability to go into outer space and looking at the earth as a tiny blue marble from outer space reminded everyone that there is only this one Earth that we all share. And then going forward into the 1980s, you had the Brundtland report, which made the concept of sustainable development famous. Then in the 1990s, you had the Rio Earth summit, the increasing focus on global environmental issues, big developments. I think towards the late eighties and early nineties, obviously the collapse of the Soviet Union and from a world which is sort of fragmented and polarised between, you know, the non-aligned nations, the Western block, the Eastern block, you had this gradual tendency moving towards one interdependent global market. So I think in the context of all of these developments there’s been much greater light that has been shined on what is the role of the private sector, businesses and corporates in the context of the kind of new society that's emerging. And obviously greater integration interdependency and also the fact that technology is coming to your help now on a variety of issues, means there are more choices that could be made in terms of the way in which we are to take development forward. 

👉🏾 In all of that context, I feel that really we are now poised at a new sort of juncture in human history where there's much more information available, with all kinds of stakeholders, the public thanks to the ubiquity of the worldwide web, has much greater access to information. And therefore the demands for accountability from corporates are much greater now. And therefore this is a new age of responsibility where if you're not careful, you can upset stakeholders in some part of the world, and pretty soon see your business, your market share collapse. And that's one of the points we make in the book, that Indian corporates, I don't think have yet sort of woken up in large numbers to how swiftly the terrain is changing. It's a bit akin to what we saw 30 years back in India 1991 when you had the economic reforms in India, evolved from really a socialist economy, scarcity economy into one that's as much akin to a free market economy. And at that juncture, many corporates that weren't prepared for change really, bit the dust and this time around as well, if companies don't understand the expectation that stakeholders, not just in India, but overseas, including deep-pocketed investors have from them, they could stand to lose out big time, so it is a new age of responsibility. 

👉🏾 On the question of purpose, you know, I have a quote in my book which interestingly enough is actually Larry Finks quote at BlackRock. And I think probably it's the best sort of definition I've seen of what purpose can do for businesses. So it's something that really is quite profound. So he says "Profits are essential, if a company is to effectively serve all of its stakeholders over time, not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision making and ultimately helps sustain long-term financial returns for the shareholders of your company".

👉🏾 I think that's the best example I've seen of what purpose can do for businesses. So you're quite right that it's integral to this whole idea of us moving into this age of responsibility and companies that are not purpose-driven, that don't have a clue about why they are here and which stakeholders that you are really tending to serve, to the best of the ability through their products and services. I think it will very quickly sort of get found out. So I think it's critical to explaining to your audience, you know, what you really stand for. 

👉🏾 So SDG is another acronym. So there is this whole mess of acronyms out there that have a lot of people scratching their head, wondering what these all really mean. But no, think it's all part and parcel of this evolution that we are seeing. So call it by whatever name you want, the fundamental point is that - there is an expectation of corporate responsibility whether it's expressed through your commitment to different sustainable development goals. Whether it's expressed through your demonstration of performance, on what are called material ESG issues, nobody's expecting every company to be equally good across the spectrum of ESG issues, but those that are material to your industry, you should be good on those.

👉🏾 I think that expectation is now qualitatively different and more measurable than perhaps at any previous point in human history. Like I mentioned, the availability of information is so widespread now, that if you have a plant in a muffasil area in India for instance that suddenly starts leaking emissions on big scale, this is something that can get protest as far away as the United States and stakeholders will take action. That is qualitatively different from the kind of impacts that you would have seen say 30, 40 years back. And because of technology also, people have the tools now to do something about these issues.

👉🏾 So I think the visibility, the scrutiny, all of them are qualitatively different of a much higher order. And the expectation of accountability therefore is also of a much higher order. And ultimately it's back to basics, right? We're expected to live the right values, we're expected to comply with the law, you're expected to do your part in really contributing to society and to the development of the community. That's what sustainable development is all about. You want to leave the world a better place than what you inherited. Otherwise, future generations are going to be extremely critical and upset. We've already seen that in the behaviour of millennials these days, much more environmentally sensitive and conscious.

👉🏾 The good news is, I think governments are beginning to be responsive, they're understanding that civil society has these concerns. If anything the last couple of years, thanks to COVID, I think a lot more people, that are much more in tune with nature and understand, you know, the context in which we've been allowed really to impose the natural environment. So I think governments are also now beginning to play their role with regulation, with policies that are on the whole, I think, proving to be more beneficial. We saw at Glasgow, whole bunch of governments coming together and talking the right talk about what they want to do to avert climate change.

👉🏾 And we are all in this together, I think that's the one big thing that global environmental issues have really done for us. The fact that, very similar to the same stance we take on COVID, nobody is safe until everybody is safe. You can't deal with the global environmental issue unless everybody collaborates. So I think that need for collaboration means that there are many more agents of change who are keeping an eye on what's going on and trying to collaboratively engineer the changes that are going to be important if human kind to survive in the long term. 

👉🏾 So I go back to the point about materiality. I think every business when it thinks about its ESG impact and where it wants to or needs to improve, we look at what is relevant to its business. And on the S, I mean, the S is a combinations, it's essentially social. So the combination of elements that may be relevant to the people within your business, your employees, for instance. In India contract labour is a big issue for instance. And it applies to the communities around you and outside stakeholders that you impact the human beings who live in those communities.

👉🏾 So you really have to decide, you know, what kind of organisation you are, where you have the greatest impact, what kinds of communities you need to engage with, and what kind of performance you want to demonstrate going forward. Pick out the most material issues, and then focus on those. So in India for manufacturing, for instance, I think contract labour is a major issue.

👉🏾 That terms and conditions under which many, many people labour and work are quite unfair a lot of the time. They work under contractors who don't necessarily provide them the benefits they're meant to under the law, that could be a big issue. The complexion of the workforce which is part of your organisation is another big issue. In India as I pointed in the book, two major challenges that you see across the board, one is gender diversity and the other is recruitment of members of the scheduled caste, scheduled tribe communities. Again you'll see that in the power structure, whether it's corporate India, whether it's the judiciary, whether it's a representation in parliament. These communities, women, the SC-ST communities, the physically challenged are all very, very poorly represented.

👉🏾 So if you want a more equitable society, if you want a more equitable framework in which stakeholders are willing to support what you stand for, you need to do something about where do you see a gross sort of inequality and I think many companies can do a lot of things to address these issues. Starting with the recruitment policies, the kind of support to provide people within the workforce, the kind of encouragement they give and to some extent affirmative action. So I think there's a range of things that you can do once you've identified really where you as a company are operating and where you can have the greatest impact and influence. 

👉🏾 And not enough companies actually apply their minds to that, they sort of take the situation as something that exists and do very little change it. And my proposition is, if you don't start interesting yourself in the kind of society you are already living within, pretty soon you could see social strife, and in a country like India with the levels of inequality and poverty, it's not surprising that you've had many sort of situations where local communities have erupted in defiance of the operations of a particular corporation and that doesn't bode well for the future. So before it's too late. I think all businesses need to really understand the context in which they're operating and do more to show that they really are caring and concerned about the future.

👉🏾 No, absolutely not. I don't think it has anything to do with your stage of development as a market or an economy. I think these principles, I mean take human rights, for instance, I don't think it matters whether you're a rich country or a poor country. Human rights are human rights and should be respected regardless. And India, I think has so much work to do. I mean, take the issue of affirmative action in particular, in favour of schedule caste, schedule tribes. You know, you go back around almost 14 years to the 2006, 2007 period, when you had the UPA government at the centre and there was a lot of talk at that time about potentially instituting reservation in the private sector.

👉🏾 You already have reservation in the public sector for schedule caste, scheduled tribe communities. But there was talk about introducing it for the private sector. And then you saw a flurry of activity for a few years when India corporates tried to put their best foot forward in order to avoid government action, legislating this kind of reservation. But somehow the tempo has been lost after that. So some of these issues are not new. They are well understood, they're well known. Take the issue of gender diversity again there are World Bank studies that actually demonstrate that female participation in the labour force has actually shrunk by 5% in the last 20 years.

👉🏾 So this is not something that we were unaware of 20 years back, and it's not gotten better, it's gotten worse over time. So I don't think your stage of development has anything to do with this. I think it's just a function of one legislative pressure. Unfortunately, as I pointed out in my book, too often corporate India responds when the heavy hand of governments suddenly looms large. And until then they sort of coast along doing very little, there are obviously honourable exceptions to this, including some of India's largest firms. I was privileged to be part of the Tata group for 23 years and I know that in Tatas a lot of these issues are taken very seriously and the group tries to do its best. But there is enough scope for Indian businesses to change and as I keep repeating in the book, if they don't realise that these concerns are becoming quite strong and change fast I think they will have a very heavy price to pay. 

👉🏾 Absolutely and that's a big worry, but you know, I mean each corporate house in India, the largest companies are controlled mostly by some of these corporate houses. I think they're beginning to get it and most of them are trying to do something about it. If I take an issue like climate change now as a major ESG issue, I can see that a lot of, at least the larger companies which also have significant exposure overseas, they have footprints in other markets they're aware of trends around the globe. I think many of those businesses are really putting their best foot forward, being quite smart about the way they're thinking about business in the future, trying to put in place strategies to address the climate change issue. I mean, one of the best examples is India's largest private sector company Reliance Industries, despite being in the oil and gas space, has announced 2035 target to get to net zero. Talking about deploying huge amount of investment in new spaces like green hydrogen. So I think the larger companies probably already get it, and are beginning to do the right thing.

👉🏾 As you go into the small and medium enterprise space, I think you have many more challenges. Many of these businesses don't have, the surplus capital to be able to make the right investments. They don't have the kind of exposure which large corporates do to international trends. They often don't know what the best new technologies that are emerging, where they can be procured, which ones they should take a bet on, what kind of risks they're embracing. And that's the space where I really worry about the future that, many of the smaller businesses you know, how quickly can they adapt to these new changes and if they're also at risk of getting excluded from the entire commercial process going forward. There are already suggestions that you're seeing increasing concentration take place in the Indian economy with the big getting bigger, particularly after COVID and the introduction of the GST regulations, the formalisation of the economy. And this is a trend you're seeing in other markets also. A lot of the tech firms now are so big, they're giants with trillion-dollar plus market...