Nakul Zaveri, Managing Partner, Relativity Investment Management

14 May 2022 , 01:24 PM

In an interaction with Mamta Maity, indiainfoline.com, Nakul Zaveri, Managing Partner, Relativity Investment Management said "Being sustainable has various benefits which include reducing business costs, improving business reputation and obtaining a competitive advantage."

What is Relativity’s thesis/take around sustainability?

At Relativity, we invest in high-growth companies that are under pinned by technology, innovation and sustainability to build a more accessible and efficient future. We look for businesses that have commercial traction and are positioned to benefit from mega trends. The Investment thesis is ESG first with Impact orientation.

Why do you think sustainability at large will become as critical and integral as digital technologies?

“The human ability to ensure that the current development meets the needs of the present without compromising the ability of future generations to meet their own needs” was the first widely accepted definition of sustainable development. Sustainability essentially means the ability to endure and covers a wide spectrum of areas.

Profit with a purpose is increasingly becoming the new benchmark for growth. Worldwide, search interest for sustainability reached record highs in the year 2021. Sustainability has become crucial as the world is faced with overexploitation of resources. Sustainability ensures a future and a healthy habitat for all. Being sustainable has various benefits which include reducing business costs, improving business reputation and obtaining a competitive advantage.

Large organisations like Unilever, Nestlé, H&M have already started treating sustainability as critical aspect for driving growth, managing risks and increasing margins by moving towards sustainable supply chain and reducing their carbon footprint.

Which themes does Relativity cover?

We invest in 2 long term themes of “access” and “efficiency & optimization”. These themes are derived from long term shifts essentially mega trends of increasing use of technology, climate change and demographic shifts.

Why do u think sustainability is an important factor for Indian business/start-ups?

Sustainability is not a new term but it is gaining recognition because it is becoming evident that Sustainability isn’t just something we “should” do for the environment, it’s something that we “must” in order to maintain the quality of life for present and future generations. It is a growing mega-trend and is being heavily adopted by companies across the globe.

Sustainability has become extremely crucial for start-ups too, it helps in gaining customers trust, attracting investors, ensuring compliance with regulatory norms and also retaining and motivating talent. Companies which are sustainable have a very clear economic moat which translates into a long term competitive advantage.

How quantifiable is the ESG metric?

Understanding ESG provides additional layers of information that is usually not captured in traditional set of accounting standards. There are multiple metrics, numerous frameworks and many standards across the world that are getting clearer and well defined over a period of time.  We have now sectoral benchmarks. For example, if you're looking at a personal care company, there are ESG benchmarks that can be applied to that company, which can be quantified and integrated into a financial model. However, for that, you need to take an be an active ESG engagement approach. 

How does the ESG model perform, can you help simplify this in layman terms?

ESG ratings, disclosure and investment approaches represent a growing tool for integrating sustainability considerations into investment processes. Currently, standardized approach for calculation or presentation of different ESG metrics are evolving dynamically and simultaneously across both commercial and public platforms. Few of the ESG metrics to be tracked include: Carbon footprint reduction, energy efficiency improvements, business ethics, diversity & inclusion and health & safety compliance.
At Relativity, we leverage tools such as screening checklists, incident reporting templates and ESG sector risk ratings to effectively and consistently deploy ESG best practices for each transaction.

Our ESG approach also leverages international best practices and codes to deploy standards that go beyond compliance. We ensure regular engagement with our stakeholders: portfolio companies, investors, regulators and industry thought-leaders, to ensure our ESG processes remain relevant and up-to-date with industry thinking.
 
Why does climate change still remain the most material ESG issue?

In a poll conducted by Verdict to identify the most material ESG issue, climate change was voted by a majority of the respondents, followed by resource scarcity and supply chain. The number of weather-related disasters have risen by 5x from the 1970s to the 2010s, with economic losses related to those events crossing $1 trillion in the 2010-2019 decade. Recently a report by IPCC (Intergovernmental Panel on Climate Change) also warned of ‘irreversible’ impacts of global warming.

The financial costs of not adapting to climate change can be high, hence organisations need to act to ensure they do not face immense disruptions to their businesses.

Companies which stay ahead of the curve are poised to have a long term edge.

How can the ESG factors help future-proof Indian businesses?

We are going through a phase of uncertainty along with several natural and social disruptions making companies’ reconsider their business strategy. We are in a VUCA world: Volatile, Uncertain, Complex and Ambiguous.

ESG not only provides an evolving framework to address VUCA but also provides businesses long term value by preserving profits, people and the planet. Consumers now expect socially responsible and sustainable practices across industries. Investors and policymakers too are looking for and supporting companies that prioritize ESG.

Businesses are moving from non-financial reporting to integrated profit loss statement which tries to highlight the positive and negative impacts of the business operations. Having a dynamic ESG strategy has become vital and is playing a growing role in the success of a brand.

Why are companies rapidly looking at re-organizing their businesses and shaping their strategies around ESG norms?

Businesses have now realised that ESG factors can act as a catalyst in grabbing opportunities and managing risk by staying ahead of the dynamic business environment. ESG integration is also important for engaging and retaining quality talent, boosting their motivation and increasing overall efficiency which is directly linked to increased stakeholder returns.
 
In the recent past, we have seen several companies which are allegedly having governance issues which are tarnishing their public image and are destructing value. Companies that reorganize their business strategies around ESG norms will likely be seen as more attractive by investors and investors like us are aligning our portfolios towards better ESG performance translating to long term competitive advantages.