Countries that are poorer will have to spend much more on coping with global warming, which can cause havoc for coastal areas, for land productivity.
Conglomerate ITC Ltd’s concern for the environment and its initiatives to preserve natural resources are beginning to get recognition from consumers and translate into financial gains for shareholders, chairman Y.C. Deveshwar said on Sunday.
In an exclusive interview, Deveshwar said all Tata group companies, for instance, had decided to use only Paperkraft Premium Business Paper, a brand of printing paper manufactured by ITC using environment-friendly technologies and renewable resources.
Though it is slightly more expensive, Paperkraft is the preferred brand for at least two top Bangalore-based information technology companies, he said. “They use it because they want environment-friendly products... Paperkraft has the least environment impact.”
For the same reason, mobile phone manufacturer Nokia Oyj uses ITC’s packaging material extensively in a number of countries where it has manufacturing facilities.
“As far as possible, we are trying to integrate creation of value for the society into our business strategy, and we are trying to see that in the medium to long run our initiatives create value for our shareholders as well,” Deveshwar, 62, said.
In the rare interview, Deveshwar spoke extensively about ITC’s businesses and focus on sustainable development. Edited excerpts:
What was the inspiration to create social wealth and are ITC’s shareholders supportive of these initiatives?
World Bank has redefined the poverty line at $1.25 (Rs59), and (by that measure) 420 million people (in India) live below the poverty line. As a citizen of India and the leader of a large company, I have been thinking what we could do beyond the traditional role of serving the consumer and creating shareholder value.
Businesses have the resources, and they must take part of the responsibility. I know it cannot be done by businesses alone either—all organs of the society have to join hands to be able to deal with this massive problem of poverty on the one hand and climate change on the other.
There’s threat of global warming—it is going to impact emerging economies much more (than developed economies). Countries that are poorer will have to spend much more on coping with global warming, which can cause havoc for coastal areas, for land productivity.
On the one hand, India is a very young country. Every year 10 million (new) people will come into the job market, so how to create livelihoods for those many people every year?. On the other, how to manage the scarce resources that India has— we are 17% of global population, but we have only 2.4% of land mass, 4% of water resources and 1% of forest resources. We have one billion-odd people and everybody wants to upgrade the standard of living. So what would happen to the quality of air and to the quality of soil?
Traditionally, our balance sheets do not reflect the cost of all the resources that we use—the carbon that we emit, the water that we use, and what replenishment (of these resources) would cost.
In the developed world, people now have begun to decide what they buy based on how responsible the manufacturer is, and in India, too, in the long run, society’s well-being and businesses’ well-being will converge. The problem is only in the short run, when businesses incur a cost, so they let the society bear the cost, but over a period of time, if society prospers, businesses will also prosper.
Creating potential markets and creating sustainable livelihoods are two sides of the same coin—if people don’t have income, there won’t be markets.
The problem is whether you can bear that cost in your balance sheet. So you have to find a way to be compensated for it. But I am sure over a period of time the goodwill that we create will translate into better returns for shareholders as well.
Shareholders cannot continue to get returns if the business is not sustainable, and if we don’t have the goodwill of the society, the business will not thrive in the future.
But how do you translate the social wealth that you create into financial gains for your company?
That’s the bigger question—companies that create such value for society, how can they be compensated in their P and L (profit and loss) account?
If consumers begin to exercise their choice in favour of those companies that not only provide goods and services of high quality, but also create additional value for society, then every company will have no choice but to do this.
But how do we communicate to consumers? How can they measure which company is doing what? ITC has been publishing a sustainability report every year—globally, there’s a major reporting initiative. And then it’s a matter of measurement and using some kind of index. We think there should be something that we call “trustmark”. A new yardstick has to be created by which people can measure what companies do.
There are auditors who are auditing financial transactions. Similarly, auditors can be created who can measure your contribution to society, and “trustmarks” can be given which are published on your products and can be recognized by consumers.
Civil society, or consumers, are going be a big determinant—that’s one thing. The other thing is government policies. If the government wants to mobilize the resources of the corporate sector for creating social wealth, then, if not tax breaks, it should provide incentives. The government could offer such companies preferential treatment in its buying programme. The government must recognize responsible companies in some manner.
Obviously, it hasn’t come to that situation yet...but the ‘T’ in ITC in our view should stand for trust and trusteeship. We believe that in the long run companies who are more responsible (towards the society and environment) would have more sustainability of their prosperity.
For years, ITC has connected rural markets through its e-Choupal initiative. What kind of value has it created for the company?
Seventy-two per cent of India’s population lives in the rural areas, and when we say 420 million people are below the poverty line, most of them are in rural areas. There are 640,000 villages and 60% of these villages have fewer than 1,000 people. So income levels in these villages will not justify creating infrastructure and connectivity for these low-density settlements. That is why very few companies service below-100,000 markets. So our model—e-Choupal—at one level helps the farmer improve his productivity and access to markets, and at another level, we are converting them into an economic entity and creating markets for tomorrow.
To make it a viable proposition, we have got other manufacturers to ride our e-Choupal channel, so the cost of maintaining the channel gets shared by producers of a variety of goods and services. For instance, it is being used by producers of seeds, pesticides and fertilizer. Now, people can buy even motorbikes on the e-Choupal, or lease a tractor. And the goodwill that we are creating will eventually help us market our own products also.
For us to be internationally competitive, it is necessary for our whole value chain to be competitive. So, we launched our foods business only after establishing the e-Choupal channel to give the business more sustainability. Because we are buying at the farm gate, and not from the mandis (markets), we are able to buy some 18 different grains (varieties) of wheat and blend them for different markets to suit local tastes—India is not one uniform market.
When will your newly launched consumer goods businesses start turning profitable?
The conventional wisdom is you should do one thing at a time. But our belief is once you have set up a distribution channel, introducing businesses one by one will take a long time, and the benefits will be very small—we are in a hurry.
But in every business we have entered, we have different competitors, and they are well-entrenched players. We have taken upon ourselves a gigantic challenge of competing with multiple FMCG (fast-moving consumer goods) players. It will take a little longer (to become profitable), but eventually we will emerge as a big player.
We are happy with the way things have gone so far. At the moment, we are giving each business the resource support that it needs. Now you’d see the losses coming down in these businesses, unless we decide to enter new segments.
When do you think this downturn will end?
We have a stable government, and I am very optimistic that measures will be taken and in the not so distant future, we will again see double-digit growth. In the last quarter, paper showed improvement, agri business showed improvement—though some commodities were affected, our profits increased—only hotels suffered. That’s always the first to take a hit—it’s very sensitive. But as the economy picks up, hotels will turn around. We will continue to invest...we have three properties under construction, and one of them is 1.2 million sq. ft. We are going to construct a 1 million sq. ft hotel in Kolkata near ITC Sonar (ITC’s existing hotel in Kolkata).
What’s your view on the cigarettes business? What’s the kind of volume shrinkage you witnessed last year?
We have the lowest per capita consumption of cigarettes in the world. Yet, until last year, cigarettes were 15% of tobacco consumption, now it is 14%. But the 86% is forgotten, and the 14% of tobacco consumption accounts for 85-90% of tax collections. We are hoping that the government would look at the other forms of tobacco consumption and resort to more moderate taxation policy on cigarettes and widen the tax base. What we are saying is you can shrink tobacco consumption as a whole, but maximize revenues out of it. Consumption of cigarettes in India is shrinking... Yes, people have upgraded to filtered cigarettes, which for a while can give ITC better margins, but the base is getting smaller, and it’s not a good thing.