Q&A: Tata Group's Mukund Rajan

Q: How did you come to work with Quantum?

A: When we started putting our team together, we felt it was very important to bring in a seasoned investment team with a great deal of savvy and understanding about Indian public markets, and initially, we expected to identify an individual. However, it proved difficult to find people who had the right mix of conviction about the value of ESG as well as a great track record. So, we reached out to Ajit Dayal, the founder of Quantum and a pioneer in setting best practices in the Indian mutual fund industry and building a respected investment firm that manages capital allocations of some of the most well-known long-term institutional investors. We were gratified when he offered us a partnership which he would back personally. Ajit and Quantum bring in strengths on the investment side, while several of us with credentials from the Tata Group and other leading organizations bring complementary strengths in operational improvement. We'll also be investing in world-class research, working closely with US and UK academics on ESG modeling and scenario analysis.

Q: Can you explain the value-add approach?

A: When we formed the joint venture, Ajit and his team had already been deliberating on how they could make a bigger difference through active engagement rather than a typical mutual fund construct, which is relatively passive. They loved the idea of bringing in people from industry and having conversations with promoters to help them make connections with wider networks, and where appropriate, taking board seats and supporting the strategies of these companies. Small or midcap companies in India usually don't have access to senior industry leaders and may not be aware of the best practices for communication with the broader markets and a range of stakeholders. But we believe a growing number see the value in ESG practices and want to stay ahead of the regulatory curve. And believe me, the regulations are coming.  

Q: How has this scenario shaped your mission statement?

A: What we want to do with this fund – and this will just be the first in a series of funds – is to help companies in Indian public markets, and investors, understand that ESG makes sense in terms of getting better risk-adjusted returns. We're targeting $1 billion for this so we can build up a portfolio of 20 to 25 companies, which should be enough to make an impact on the broader market by creating peer pressure. We should be ready to commence investing soon after the general elections in May. We will also have greater clarity on the public policies and ESG priorities of the new government.

Q: Why is this the right time and place for an ESG fund?

A: ESG issues have not been given the importance they deserve in Indian public markets, but the tide is turning. Many companies are now being hauled up before the insolvency and bankruptcy courts, non-performing assets have built up in the banking system, and people are asking why there are so many cases of abuse of power and corporate fraud. As a result, there is now a huge public discourse on the basic issues of corporate governance. Similarly, the frequency of extreme climatic events has been increasing, and there is growing awareness that India is not only a major contributor to global climate change but also will be a major victim unless something is done to control carbon emissions. A lot of new small and midcap companies recognize they have to address ESG or they'll be punished by the market, but they don't have the scale to tip the balance in favor of this kind of thinking. That's where funds like ours can help.

Q: What's the scope of the environmental pressure?

A: There's been an awakening, initially in government and now with the more enlightened corporates and the average citizen, that changing weather patterns are disrupting a lot of the fundamentals of the economy and people's wellbeing. In Delhi, it's sometimes unhealthy just to leave your home, and new rules have had to be introduced to reduce vehicular traffic. Burning agricultural waste around the city has become a problem adding to the particulate matter in the air. If you look at World Health Organization air pollution reporting, 10 of the top-20 most polluted cities in the world are now in India. There is also grave concern that India, with a large coastline, could be among the countries most impacted by global warming and sea level rise. One can leave some of the work to government to frame rules and regulations and hope it works out – or one can reward companies with better stock market valuation because they follow a higher level of diligence on evaluating their impact on the environment and on society.

Q: What about social issues?

A: In India, concerns around labor and safety standards, community engagement, and workforce diversity are wide-ranging because they straddle gender, class, and the indigenous people. The scheduled castes and scheduled tribes, who have constitutional protection, have historically been left out of a lot of the fruits of economic development. There have been some efforts through affirmative action to ensure these groups have more opportunity in government jobs but that has not extended to the commercial sector. There's also inevitably a religious element to the environmental issue because of the importance of the Ganges in Hindu culture and the agenda to clean it up along with other rivers, while improving drinking water and irrigation access across India. All these concerns around culture, health, job creation, and industry are now dovetailing together.

Q: How will ESG change the investment landscape?

A: The issues around poor compliance and lack of good governance that we've seen in some of the largest companies in India in the past few years have upset many foreign investors, and domestic investors are also now beginning to feel that local companies really need to get their act together. The fact that India is the fastest-growing large economy in the world is a major incentive to do that, but we haven't seen a huge step-up in foreign investment in the last couple of years. I think that investment activity will happen soon, but it will be calibrated. Investors will be looking for signals that corporate India has begun to understand ESG. Our fund will stimulate that, and we expect that other funds will follow us soon.

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• Topics
• South Asia
• Fundraising
• PIPEs
• India
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• Tata Capital