Despite the pandemic: New directions for Kerala – a destination for sustainable investment

TiEcon Kerala 2021
27-Nov-2021

The COVID-19 pandemic came upon us suddenly a year and a half ago — and spread rapidly. Alongside, we have been through a period when we have seen, especially in Kerala, continuing episodes of climate change-related natural disasters.

This existential vital concern was brought to the forefront at the recent COP26 meeting of global leaders in Glasgow. Most countries therefore committed themselves to clear emission reduction targets.

The COP26 meeting set a global target for the world to be net-zero by the middle of this century. This implies that the amount of greenhouse gases produced by human activity will be negated by other positive actions. These range from increasing forest and vegetative cover to migrating towards renewables for energy needs. In line with this compulsion, many firms are also adopting net-zero targets and timelines. Some are even aiming to become carbon negative.

This confluence of trends and events has brought the Environmental, Social, and Governance (ESG) philosophy centre-stage for governments, firms, and other institutions. The evolving policy and regulatory landscape worldwide, as well as in India, will impact businesses. Firms will have no option but to elevate their objectives, procedures, and ways of working to comply with threshold-standards across environmental impact, social interactions, and the quality of governance.

In fact, the protection of the environment is acquiring legal heft. A landmark resolution adopted by the Human Rights Council of the United Nations, recognizes the right to a clean, healthy and sustainable environment ‘as a human right that is important for the enjoyment of human rights’. It is noteworthy that the right to a clean environment is now recognized in more than a hundred national constitutions across the world. France has taken matters a step further by introducing a ‘duty of vigilance’ law in 2017. This law holds companies responsible for preventing violations of human rights or environmental regulations throughout the entirety of their supply chain.

This plethora of trends will increase the pressure on companies to hold themselves to higher ESG standards. These pressures are coming from shareholders, affected communities, the media and other stakeholders. Investors, be they private equity funds, sovereign funds, or even individuals, are clearly indicating that they will attach a premium to companies that execute responsible ESG agendas.

On the regulatory front in India, the government as well as the Securities and Exchange Board of India (SEBI) are introducing new ESG compliance and ranking thresholds for firms. The Ministry of Corporate Affairs is focusing on key themes like sanitized value-chains, labour welfare, gender equity, and other fairness indices. SEBI has mandated Business Responsibility and Sustainability Reporting (BRSR) for firms.

This newly awakened global consciousness bodes well for Kerala. It plays right into the ethos of the state as a location where the people, as also the terrain, are sensitive to environmental impact. Moreover, Kerala’s discriminating public will increasingly watch the approach and policies adopted by firms vis-à-vis their transactions with their stakeholders; including local communities, and suppliers along their value chain. A firm’s moral code, the fairness and decency with which it deals with its employees and stakeholders are matters of concern in an enlightened state like Kerala. Thus, Kerala is a fitting locale for sustainable business and investment.

In this context, it is very heartening that the state has initiated efforts to become a net zero state. I understand that a committee is at work on this magnificent endeavour. If Kerala can progress well towards the goal of becoming a carbon-neutral state, this aspect could become a key differentiator for attracting a fresh wave of enlightened firms and responsible investments.

I would suggest that a key motif informing the state’s industry and investment promotion efforts should be the theme of Kerala as a leader in sustainable business.

Thus the Industries Minister’s announcement at the inaugural of this event about the central theme of Kerala’s refreshed investment promotion efforts being about sustainable investments with an ESG approach, cannot have been more topical and timely. I understand that the Minister focused on a 5R framework for sustainability: Responsible industries and investments, Reducing regulatory compliance burden, Robust industrial infrastructure, Renewed logistics ecosystem, and the Resilient thrust sector focus. The state government is also planning a star rating system for ESG-compliant industries, where the better rated industries will benefit from smoother regulatory processes.

In line with this theme, Kerala can aim to be a leader in sustainable entrepreneurship. There are stellar examples of successful enterprises in this domain such as NavAlt which has pioneered solar powered and electric boats, and Genrobotic Innovations which has engineered robotic products and solutions for waste extraction from sewer manholes. There are well-governed, women-driven small enterprises under the aegis of Kerala’s successful Kudumbasree programme; this has become a global model for small-entrepreneurship, women’s empowerment, and poverty alleviation.

Thus Kerala can be one of the first states in the country to break away from the traditional catch-all model of investment promotion that seeks all kinds of investors including conventional manufacturing and smoke-stack industries. Kerala can develop a policy and ecosystem that is focused on emerging new areas that fit with the state’s ESG sensitivities and aspirations.

I am reminded of an impressive speech that the then Prime Minister of Bhutan, Tshering Tobgay, made at the Vibrant Gujarat investment conference in January 2015. He made clear that Bhutan valued its gross national happiness more than its conventional measure of GDP. He said that he wanted investors to come to Bhutan, but only for clean, green and sustainable businesses. He emphasized Bhutan’s carbon-neutral policies and pollution free atmosphere as key attractors for investors.

Given its environmental setting, its social structure, and its discriminating population, Kerala can take the lead in pursuing a similar aspiration.

An ESG approach for Kerala

Three sets of compulsions – stakeholder demands, investor concerns, and regulatory tightening – are converging, and compelling firms to be increasingly compliant across the domains of environmental impact, social acceptability, and internal governance. We are seeing an increasing trend of firms scrambling to perform better on ESG measures. It has now been well-established that the financial performance of the better firms and their ESG compliance indices tend to follow parallel pathways.

This is a moment of opportunity for the state to position and brand itself as a unique locale where the geographical, political, and social setting will induce better compliance across the ESG axes.

Let’s drill down on each of the three elements of ESG as it pertains to Kerala and entrepreneurship:

Environmental fit –

  • Kerala is working on an action plan to transform the entire state into a carbon-neutral territory
  • Panchayats like Meenangadi in Wayanad district have been positioning themselves to become carbon-neutral. A slew of initiatives have been launched there such as organic farming, intensive tree planting and forest creation, tree banks, water conservation, and innovative waste disposal.
  • Given Kerala’s terrain diversity, density of water bodies, and overall environmental sensitivity, compulsions to mitigate environmental impact will naturally drive investors and firms to be compliant in this dimension.

Social interactions –

  • Kerala has some of the most vibrant grass-roots level governance institutions in the country, and public and media scrutiny of establishments and actions that impinge on society tend to be high, as befits an advanced and civilized society.
  • Kerala also provides relatively equitable access for all to public services, as well as the educational system, the healthcare system, and judicial establishments. In other words, the culture of fairness and equitable treatment are inbuilt into public institutions, while behaviours that tend to be grossly unfair and injurious to the common good, tend to get called out very quickly.
  • Investors who can demonstrate a culture of fairness, and who can establish that the value benefits exceed social and environmental costs, will find that the state is fertile ground for sustainable value creation.

Good governance –

  • Given the pressures on firms to improve their internal governance, polices and processes in terms of fairness in people recruitment, gender parity, HR policies, board oversight and supplier-treatment, investors in the state will find that the social and cultural ecosystem of the state, as well as the presence of an enlightened and aware workforce will provide strong incentives for firms to adhere to good governance practices.

Such an evolved ecosystem will prove to be a strong positive force that has the potential to propel firms upward along the ESG value chain.

New-age industries for Kerala

Apart from the mounting pressures for firms to be ESG-compliant, great opportunities for the state arise in businesses that provide environmentally friendly products and services. These would be domains that have lower physical & environmental impact footprints, increased requirement of highly skilled workforces, and access to high-quality internet infrastructure.

The foundations are already in place for developing capabilities and attracting investments in a number of emerging high-technology areas.

  • Industry 4.0 – Kerala has established small clusters of frontline manufacturing units where there are opportunities to apply Industry 4.0 technologies. For instance, there are a number of aerospace centric equipment suppliers in the Trivandrum region, and a local company called Vinvish supplies key parts and software for the SpaceX programme through its US holding company. There is also an emerging medical-equipment cluster in the Kochi-Palakkad belt. What may be needed is the ability to scale-up rapidly by deploying instruments like Industry 4.0 technologies.
  • Artificial Intelligence (AI) –  Kerala has cultivated its own niche software product firms that are now entering into cutting edge AI. Homegrown firms like IBS Software, SunTec Business Solutions, Envestnet Asset Management India Private Limited, as well as newly emerging firms like CLAP Research, Genpro Research and Jiffy.ai are all using Artificial Intelligence and Machine Language. Scaling up AI and ML-based industries in Kerala would also require focused skill development and curriculum modification efforts.
  • Augmented Reality & Virtual Reality – Firms in Kerala have been early movers in this area, from the days of ToonZ Animation India Pvt. Ltd., to emerging startups like BuildNext. This domain calls for a blend of technical prowess and visual artistry, which are both areas in which young Keralites excel. New developments like Facebook’s Metaverse and the associated mixed reality developments can provide new opportunities for Kerala. Kerala can also be one of the first locations worldwide to deploy AR/VR in the Metaverse world in areas like Virtual Kerala Tourism experiences and marketing.
  • Blockchain & FinTech – Today Kerala is a nerve center for Hyperledger’s India collaboration efforts through the Kerala Blockchain Academy (KBA), and these graduates are highly sought after in the industry. Allianz Technology runs its Global Blockchain Center of Competence from Trivandrum, while DLT Ledgers, one of Southeast Asia’s marque companies in Distributed Ledger Technologies, has its development center in Trivandrum. The state government is also expected to embrace Blockchain technology for many of its processes, issuance of certificates, and other services.
  • Electronics & High Tech – Kerala, for obvious reasons, is one of the most appropriate locations in the country for High-Value Low-Volume (HVLV) technology-based industry. Some of the successes in Kerala include SFO Technologies, and Genrobotics. Kerala has a wonderful state-of-the-art incubation facility – Maker Village – offering an ecosystem, hardware facilities and valuable connects for aspiring entrepreneurs in this area.
  • Specialized Content Creation – Many content-centric industries like Audio & Video are going through a Non-Fungible Token (NFT) boom. An opportunity may exist to leverage the inherent blockchain talent base, as well as audio-visual oriented talent among the young, to develop an NFT industry in Kerala.

Let me touch upon some potential elements of a redesigned strategy for attracting investments, and for enhancing entrepreneurship.

For Kerala to move ahead of the pack in its investment aspirations, government, industry, academia, and specialised bodies like TiE need to come together to undertake intelligent trend-spotting and to locate sectors and investors who are leading these trends. This should feed into a program to inform target clienteles of the locational and environmental advantages that the state can offer. Such an exercise cannot be undertaken by government alone.

  • It would be desirable to identify appropriate, technology-dense industries and sectors, and tailor comprehensive packages for them, encompassing land availability, provision of energy and water, skilled workers, facilitating access to markets, and government handholding.
  • Like the successful Kerala tourism campaign, the state can launch a global campaign to position Kerala as an attractive destination for sustainable investing and high-end value creation. This would showcase Kerala’s unique ecosystem that provides natural inducements for firms to improve their positioning in terms of ESG compliance. Kerala’s advantages in terms of its social tranquility, its locational advantages, availability of skilled manpower, and its culture of fairness and equity, could all be highlighted in the campaign.
  • In the domain of entrepreneurship, the focus should be on sectors, areas, and products, where the value creation and technical elements are very high (HVLV) and ESG congruence, and which is in tune with the recent innovative developments in global markets.
  • TiE can act as an enabler and a catalyst for many of these initiatives, and also as an honest broker for bringing all the stakeholders together, easing the pathway for fresh investments into the state.

Conclusion

In conclusion, it must be noted that global value chains and businesses are being disrupted and transformed by a perfect storm of converging forces. These include pressures to be ESG-compliant, the emergence of new HVLV domains, and disaggregated value creation based on high-speed connectivity. There is a need for new safe harbors offering security and sustainability in the wake of recent geopolitical tensions affecting supply chains.

Kerala as a territory has the natural endowments and social attributes required to emerge as a leading destination for technology-rich sustainable investments.

Positioning Kerala to take advantage of these novel trends cannot obviously be the task of government alone: industry bodies like TiE, opinion-makers, the media, and concerned institutions need to work in concert towards this goal.