10 November 2005 -

(This lecture was given on October 21st, 2005.)

Good Evening! I feel honoured to be with you today and quite thrilled by this opportunity to share my excitement about the possibility of Mindful Markets.

Now what on earth are mindful markets? And should I take your time this evening, to talk about any kind of markets? After all, you spend your working hours deep inside the maze of capital markets. This evening you have stepped out of office for a celebration, a party. And indeed you have much to celebrate. Within just two years of being founded you became India's largest stock exchange. Your success in raising the standards of capital markets is a seminal and historic contribution to the upward graph of the Indian economy and will shape commerce in the 21st century.

Given the magnitude of your achievements I feel both diffident and enormously privileged to be invited to speak at your annual day. So, firstly, thank you for your time and attention for some stories about a nascent transformation that is unfolding in the markets of the world.

Why didn't the extensive advertising campaign of Suzlon's IPO loudly declare it as a Green Investment? Why did Suzlon sell itself to investors as just another expanding business and not as a planet saving, life saving enterprise? Perhaps Suzlon’s sales pitch was inhibited by the fact that there isn’t – as yet – a ‘market’ for overtly Green Investing in India.

Mindful Markets are as yet an aspiration. This term refers to a broad range of efforts that aim to ensure that markets truly, and more fully, work for the common good. But let’s start the evening with a story that recalls our childhood fascination with how those wiggly ground-bound caterpillars transform themselves into air-borne butterflies.

Let us reflect a moment on that phase when the caterpillar has turned into a seemingly inert and dull chrysalis. But inside that chrysalis an incredible revolution is taking place. Within the amorphous pulp of the erstwhile caterpillar new kinds of cells begin to appear which some scientists call “imaginal cells”. It is these cells which carry the code, the pattern of the yet to be formed butterfly. The old caterpillar cells, naturally resist these alien cells and fight back. But the imaginal cells are determined little fellows. Gradually, the old cells get the message that they are not being threatened with destruction. Instead the imaginal cells are an invitation to be transformed into an incredibly beautiful new creation. Thus the butterfly comes into being.

The striving to foster Mindful Markets is today akin to those imaginal cells. So it is perfectly understandable if, at first, the idea of fundamentally re-programming markets seems destructive, anti-profits – some kind of fluffy romantic non-sense.

But what if we are indeed at the threshold of redefining profit itself. What if we don’t have to worry about making money at one level of life and worry about the quality of the air we breath at some other level. What if money making, our own health and the planet’s health are all missions we can address on one plane? Some of this can be done by adding social and environmental filters to capital markets.

The motives for doing this are rather powerful. One because almost half the world’s people are so poor that they are barely window-shoppers in the global bazaar as you and I know it. And, two, because the survival of the affluent classes and the planet itself is now seriously under threat.

Most of us accept that the Torrential Tuesday of July 26th was a freak act of nature. We would prefer to think that the sky can’t make a habit of dumping 37 inches of rain over one area in just 24 hours. But the really serious bad news is that this kind of deluge is likely to become more frequent and intense. This is no longer a “what if” scenario. Katrina and Rita did strike within weeks of each other. What meteorologists used to call once-in-a-hundred-years kind of storms are now expected to strike several times within one generation.

For example, there is a 3 km dense cloud of pollution hanging over Asia which is affecting our weather patters in all sorts of ways. This semi-toxic cloud is not an act of nature. We put it up there – you and I – with our emissions from automobiles, air conditioners, factories, forest clearing and even inefficient use of biomass fuels. Climate change is no longer a future threat. It is here, now! Back in 2003 the World Health Organization declared that an estimated 150,000 people are dying every year due to climate change related events.

So where do we go from here?

What forms of damage control are open to us?

Let us begin by being clear that we don’t have to accept any one environmental projection of the future as gospel. But we do need to remember a simple and basic fact of life: Nature bats last and it owns the stadium!

So what’s the good news?

The good news is that we have the means for being long term players in the stadium provided by Mother Earth. Like any other crisis this one is an enormous, even epochal, opportunity.

Let’s dwell a moment on a matter that many of you may have directly dealt with just last month – the much publicized IPO of Suzlon – a company that is in the business of wind power. Suzlon’s website’s opens on the logo : “Powering a Greener Tomorrow”. So why didn’t the extensive advertising campaign of Suzlon’s IPO loudly declare it as a Green Investment? Why did Suzlon sell itself to investors as just another expanding business and not as a planet saving, life saving enterprise.[1] Perhaps Suzlon’s sales pitch was inhibited by the fact that there isn’t – as yet – a ‘market’ for overtly Green Investing in India.

You might ask that since Sulzon’s IPO did very well in any case why bother with claiming credit as a green investment?

Of course the cultivation of Mindful Markets is about much more than capital markets. But today we will focus on just one aspect – namely the attempt to mold markets through Socially Responsible Investing, which is also sometimes known as Green Investing, Sustainable Investing or investing for the future of this planet and children yet to be born.

The phenomenon of Socially Responsible Investing officially arrived on Wall Street in 1999 with the launch of the Dow Jones Sustainability Index. In 2001 the FTSE4Good was set up in London.

Let’s hear more about this from one of the American pioneers of SRI, Amy Domini – who was listed by Barron’s magazine as one of the 30 people who changed the face of finance during the 20th century:

“The socially managed portfolio”
says Amy
“ is part of something larger than itself; it is a part of a global reformation of the way business is done. …Investors stand at the fulcrum of two worlds, the world of finance and the world of commerce. By building a caring presence at this essential juncture, socially responsible investors make possible the use of the financial engine of the planet, surely the strongest human-made force at work today, as a tool for building a future that encompasses human values along with monetary ones.”

Back in the mid-1970s, when Amy started out, she was a routine stock broker. But not for long. Gradually she noticed that some of her clients expressed social and ethical preferences. This made her wonder that perhaps markets could be as much about social and environmental caring as about making money.

Through the 1980s in the US and in Europe, pioneers like Amy promoted a niche market for the kind of clients who don’t want to invest in armaments or anything that wantonly destroys the environment, or a company that exploits child labour. In the process a huge service sector has emerged, in the USA and Europe, which provides data and analysis for ethically anchored portfolio management. The managers of such portfolios ensure that they fill their client’s wallet in ways that matches their conscience. SRI investors are people who want companies to succeed through good social-environmental-financial practices and anticipation of future trends

Just how does socially responsible investing work?

There are primarily three ways: The first is Negative Screening where investors reject companies that have a bad track record on social, environmental or corporate governance issues.

The second is Positive Screening where investors actively seek out companies with a solid Triple Bottom Line – which means companies that show good results on 3 fronts, namely People, Planet and Profits.

The third dimension of socially responsible investing is Share Holder Activism which pushes the management towards a broader and deeper definition of Corporate Social Responsibility. One of the most famous examples of this is Greenpeace International purchasing shares in Shell as part of its campaign to pressurize the company’s management to build a large-scale solar panel factory.

The fourth dimension is when investors and market analysts fully integrate externalities into their evaluation of the worth of a company. For example a group of European institutional investors has launched the Enhanced Analytics Initiative (EIA) to encourage investment analysts to include issues like corporate governance and climate change in their research.

The phenomenon of Socially Responsible Investing officially arrived on Wall Street in 1999 with the launch of the Dow Jones Sustainability Index. In 2001 the FTSE4Good was set up in London. In 2004 some of the world’s largest corporations, which are part of the UN’s Global Compact initiative, declared that “Who Cares Wins”. This was also the title of a report these companies jointly issued outlining the business case for sustainability. The 18 financial institutions among the signatories of “Who Cares Wins” manage assets of over $6 trillion.

By a conservative estimate, there are now globally about 2.7 trillion dollars under management which pass through some SRI screening. The SRI movement in the West has come a long way from the days when its proponents were accused of neglecting their fiduciary responsibility by injecting subjective, non-monetary criteria in measuring the bottom line. Consider the following trends:

  • Since 1995 SRI funds have grown 40% faster than the wider investment market.
  • SRI has moved from concerned individuals to institutional strategies. For example, the Association of British Insurers has found that including social responsibility can reduce portfolio volatility and increase returns. This is partly because SRI investors tend to be ‘picky but sticky’ – more longer-term and loyal.
  • In many European countries it is now mandatory for pension funds to disclose the extent to which social, environmental and ethical issues where taken into consideration in the investment process.
  • Major investment banks are now developing SRI capacity including Citigroup and Goldman Sachs. Morgan Stanley estimates that in UK alone SRI will grow from its current position of 5% of the stock market to 15% by 2009.
  • The Johannesburg Stock Exchange has developed a criteria for measuring the triple bottom line performance of companies.
  • The Sao Paolo stock exchange in Brazil is about to launch a sustainability index in December this year. [2]

Now you might ask why we in India should overtly bother with Socially Responsible Investing when global market forces are already driving scores of Indian companies to launch projects which reduce greenhouse gases and earn credits which can be sold to more industrialized nations. According to one projection Indian companies could soon be making as much as $8.5 billion a year on carbon trading alone.

The carbon trading business is not intended to raise the social and ethical threshold of capital markets.

An investment climate which values socially responsible criteria could help us to turn business itself towards the task of not merely stopping environmental damage but regenerating our natural resource base and generating livelihoods.

This is great. But if this is all we do it will be like scrambling for deck chairs on the Titanic -- because the carbon trading business is not intended to raise the social and ethical threshold of capital markets. And unless we raise the threshold to include social and environmental factors our rapid economic growth might be a nine-day wonder. If we want steady, sustained growth we must simultaneously nurture and regenerate our human capital and natural capital.

Thus, an investment climate which values the socially responsible criteria could help us to turn business itself towards the task of not merely stopping environmental damage but regenerating our natural resource base and generating livelihoods.

Let us look at just one example from the realm of water and land regeneration:

There is an NGO called Timbaktu Collective in the Anantapur District of Andhra Pradesh which has done some superb work in regenerating forests, reviving traditional water tanks and diversification of crops. All these activities are crucial for restoring the ecological balance of an area where the soil is dying because of excessive mono-crop cultivation of ground-nut.

This unsustainable cultivation was driven by an old style Market with its one dimensional concern for the money value of what this area could produce – not its long term social and environmental toll. In this old framework the negative side effects were expected to be tackled by governments and NGOs.

So when many farmers in Anantpur decided to diversify crop patterns and grow more millets to rescue their soils, they turned to NGOs like Timbaktu Collective. On the open market they can’t get finance for this shift in cultivation, partly because they can’t find a good enough price for the millets in the open market.

It so happens that the Timbaktu Collective is a champion of Mindful markets. So through the local women’s self-help group it has launched an initiative within its known circle of urban supporters – inviting them to invest in the farmers. The Collective is also putting skills and resources into generating a demand for the millets which have excellent nutritional properties.

Again, such work is great but even thousands of NGOs cannot take us to our goal – which is to be a nation in which every last person has not only roti, kapda aur makaan but also swastha and shiksha. That will only happen when there are institutional changes in the workings of Markets and a broadening of the values at play in our investment climate.

The wonderful thing is that we have existing strengths to build upon.

ONE: There are already unacknowledged socially responsible investors and companies in India. I don’t mean just private niche groups like Jains who traditionally make investment decisions with some negative screens. For example, they will not invest in the meat or poultry business. For our purposes here let us focus on major corporate examples.

Most people know that TISCO pioneered the practice of submitting itself to a social audit back in the 1980s. But how many people are aware that Tata Sons has an unwritten policy of not investing in armaments? And that a huge chunk of its profits go into trusts that make grants to support excellent work in education, environmental regeneration and numerous other forms of building social capital.

It is not widely known that Gujarat Ambuja Cement goes to great trouble to restore the lands that are adversely affected by its production process. My plea is that the time has come for companies like Ambuja to make a song and dance about not only the quality of their product but that it is made in a green-caring way.

India already has a substantial universe of attractive companies that are deep into the transition towards sustainable practices. But, as yet, these practices are not sufficiently celebrated and valued in the market-place. Doing this would dramatically alter the market’s eco-system in favour of socially responsible practices by more players – in much the same way that the phenomenal success of Infosys has re-created corporate governance in India.

TWO: The burst of self-confidence that we are seeing at the moment about the future of Indian markets and the Indian economy is an ideal time for further institutional changes that will bring long term dividends of environmental sustainability and a more equitable prosperity.

The leadership for this is already there: For example, Y. C. Deveshwar’s address at ITC’s AGM this year was about “Inclusive and Sustainable Growth”. The company’s motto is “Enduring Value: For the nation, For the Shareholder.”

Nandan Nilekani of Infosys is doing path breaking work to foster public policy and IT structures that bring greater transparency, participation and thus accountability in public institutions. This is the requisite value base that will enable us to build a market system that works for everyone.

THREE: We can both learn from advances in the SRI in other parts of the world and build our own unique model. Again, there are resources aplenty:

• CRISIL already has a Governance Value Creation rating. It could as well launch a rating which gives a comprehensive triple bottom line assessment.
• The Centre for Social Markets, which works out of Kolkata and London, already brings out an objectively assembled Who’s Who of Corporate Social Responsibility and is campaigning to raise awareness about the need for triple bottom line evaluation.
• The recently founded YES Bank is committed to fully integrating the values of Corporate Social Responsibility (‘CSR’) and Sustainability into its business. In addition, YES bank supports a Zurich based not-for-profit organization called VantagePoint, which is working to promote sustainable investing in Emerging markets. VantagePoint, which has been founded by the same team that designed the Dow Jones Sustainability index. It aims to help develop the necessary information services and specialized investment activities which are the pre-requisite for Socially Responsible Investing.
• VantagePoint and the Global Exchange for Social Investment have plans for a Social Investment Re-Insurance Facility (SIRIF) to further social, “pro-poor” or “base-of-the-pyramid” investment opportunities in developing countries. The Global Exchange for Social Investment is yet another international not-for-profit company that is promoting SRI globally.
• Your own Research Initiative, with its mandate of ensuring greater efficiency and setting international benchmarks in the securities industry, is ideally poised to both link up with such global initiatives and make its own innovations.

FOUR: This brings me to our greatest advantage in the endeavour to build an SRI climate in India and that is you -- the National Stock Exchange. It is your work over just one decade which has democratised capital markets, taken them out there to small towns and small investors. Most of all you have built the necessary foundation of transparency and accountability – without which no greater good is possible. This is not only a achievement as a business but a hope-inducing inspiration which gives confidence to all who believe that India can and will be a land of plenitude for all.

I visualize a time in the near future when NSE might launch a Sustainability Index which companies will vie to get onto. If those of us who work at the interface of markets and civil society do our part of the work well – investors will gravitate towards companies that qualify for the Sustainability index. Then it will indeed be true that Who Cares Wins.

And now, lastly, the disclaimer:

Of course the path from here to sustainable markets-based development is marked by struggle and dangerously painful contradictions some of which will severely test our self-confidence and commitment. Money profits still predominantly come first and the race to save the planet needs more substantial and urgent action than existing business plans can offer.

But today, I deliberately chose not to go into those dark and ominous dimensions of the task at hand. Time enough to deal with all the difficulties on the journey ahead.

Before I take leave of you can we return for just a moment to that story about the formation of the butterfly. Just as metamorphosis in nature needs imaginal cells, society needs imaginal beings. Mahatma Gandhi was probably the greatest imaginal being of the 20th century. Yet the full impact of the Gandhiji's visionary ideas is only now unfolding and will mature further in the course of the 21st century.

So as we traverse the challenging terrain ahead, moving towards Mindful Markets, you will inevitably catch glimmers of Gandhiji and his vision of Trusteeship as the basis of industry and commerce. Half a century ago, when the world was clearly divided between capitalism and communism, it was easy to dismiss Trusteeship as a form of dreamy idealism. Not any more. Communism has collapsed and the greed is good variety of capitalism is in retreat. Today there is much more space for the idea that we can succeed in the market-place as social and moral beings not merely as slaves to some supply and demand curves. This space is being expanded both by imaginal beings and the most basic of all human urges the need to survive.

As Niall Fitzgerald, the former head of Unilever and now CEO of Reuters, has said: Sustainability is here to stay or we may not be."

A heartfelt thanks for your attention and best wishes for the onward adventure.