Sustainable investment in India is a marathon, not a sprint

A senior portfolio manager’s reflection on investing and governance in the world’s biggest democracy.

“No, no, no, you are not allowed to ask me this question!” exclaimed the manager of one of India’s leading chemical companies. There was more grinning and arm waving. By now the sugar rush from our fourth cup of molten tea that morning had kicked in. We pressed him again. “No, no, I am not permitted to tell you the answer!” Our question was innocent enough. How had the company managed to build a new factory without encountering the serious community protests and environmental objections faced by many other Indian companies in recent years? Such questions are becoming increasingly critical to any investment case in India.
“I want to see that lady behind bars,” whispered the host of our next meeting. There was an awkward silence punctuated by more shots of liquid sugar. The lady in question is one of India’s leading environmental activists. We make a point of trying to catch up with her and her inspirational organisation whenever possible. “You see, you have to be strong with such people,” our sinister host continued. We later learnt she had received an intimidating ‘visit’ from company representatives.Travelling between meetings in Mumbai, the coded messages of India’s giant billboards are revealing. “They say you can either be a sprinter or a marathoner but not both – we disagree,” shouts a leading bank. The self belief of Indian companies has spilled over into a dangerous hubris, which persists despite the financial crisis. This is affecting every aspect of corporate behaviour. Even normally sensible companies have succumbed to taking environmental, social and governance short cuts in a mad dash for glory, with little regard for the damage this will do to their long-term franchise. The hubris is not confined to the corporate sector. The government is also trying to sprint. We pass another billboard celebrating India’s first moon landing. Below the self congratulations lies a jumbled mass of slums. Naked children with large, protruding stomachs play behind a moat of black, thick sludge. We have dinner with a slum activist who warns us of the pitfalls of the current slum redevelopment plans. Over 50% of Mumbai residents currently live in slums. The next day we discuss sea mines in a stunning rooftop boardroom. Patio doors open onto a large, manicured garden in the sky.

The sounds and smells of Mumbai’s streets are a long way down. Boardroom grandees stare down at us from their picture frames while we sip tea from bone china cups. The company has just tendered for a contract to provide the Indian military with sea mines. We struggle to see the synergies with software programming. What is the rationale for this investment? How do they differ from land mines? Are they going to sell them to third parties? All questions are answered with a strong swadeshi spirit of self-sufficiency and national pride. In other meetings, we hear of ‘wicked minds’, too much ‘hue and cry’ and the advantages of non-recourse debt. The implosion of Satyam Computers has shocked the market. It shouldn’t have. The signs were there for anyone with their corporate governance eyes open. And no matter how cheap, it’s always possible to lose one hundred percent of your money. There are plenty more Satyams to be uncovered. Fortunately India is also home to some of the world’s best managed companies. We are told the importance of ‘mapping on to the entire value chain’, whatever this means. We discuss hair oil, hair dye and the pre and post wash market. We discuss Delhi discounts and Bangalore premiums, the mystery of the Hyderabad biryani and the seven wonders of Nawabi cuisine. Most importantly, we count the number of times we hear the words ‘ten-bagger.’ This is a powerful predictor of the Indian market. We reach an all time low of two counts, notwithstanding the appearance of a new variant ‘ten-x’. This is the strongest buy signal we have seen for years. “Why should we pay any tax? We can spend our taxes more effectively than the government.” At our last meeting, we discuss taxes with one of India’s best managed companies. The challenges posed bychronic poverty and inequality throw up important ethical and moral challenges for owners of Indian businesses, be they controlling shareholders or minority investors. Unfortunately ‘ethical’ investment has become a dirty term, even within the sustainable investment community. Like a child embarrassed by their parents, it is seen as an unfashionable and outdated, far from the cutting edge environmental, social and governance analysis which embodies the modern day sustainable investor. Yet, as the saying goes, if you stand for nothing, you will fall for anything. And in India there are endless opportunities to fall. While there is no suggestion that the company is breaking the law, we are concerned that they are breaking the spirit of their license to operate.

“As the saying goes, if you stand for nothing, you will fall for anything.”

Only 3% of the Indian population currently pay any income tax. The company’s unease over the use of taxes is valid. Nonetheless, the solution cannot be for everyone to opt out. As one of India’s leading companies, they risk setting a bad example, not to mention incurring the wrath of a powerful regulator. The billboards are talking to us again as we head to the airport. They are usually the best predictors of the passing of each investment season. In the “fast moving consumer goods” gold rush of the early 1990s, sachets of shampoo competed with branded biscuits and toothpaste tubes. Sell! These were replaced by the dizzy promises of internet IPOs and software programming courses. “Java is the new English.” SELL! Next up are gold, infrastructure mutual funds and property. ”You asked her to make do in a one bedroom

apartment. She did. You get up at 3 to watch the World Cup. She made you tea. Your dreams are not yours alone….” “Retire at 45. Now you can…” RUN! Amusingly, the current season seems to be shirts. White, striped, tweed, men’s, women’s. My colleague explains. It seems as though a lot of people have lost their shirts in the recent crisis.
There is, of course, one evergreen in this changing forest of billboards, but even here there are subtle changes of colour. Bollywood is still ever-present but its prudish mores are well and truly gone. Instead of the lingering gazes and wet saris, today’s starlets and stars seem to live in a permanent state of undress as they gaze down on the liquid flow of Mumbai traffic.No wonder India now leads the world in road traffic accidents – 1% of the world’s traffic, 10% of the world’s road traffic accidents at the last count. And this despite the wonderful road signs with their prosaic advice. Like the billboards, they too contain valuable coded messages for investors. Indian companies and investors are facing new environmental and social challenges, such as those discussed above, at almost every turn today. The road signs offer the best advice for successful navigation: “Speed thrills but kills”, “Be Mr. Late, better than Late Mr.” and “Darling I like you but not so fast!” Sustainable investment in India is a marathon, not a sprint.
David Gait is senior portfolio manager at First State Investments