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May 2, 2016

Signs of social risks impacting Indian businesses

Namit Agrawal   /   Namit Agarwal

In a growing economy like India social risks are ever-present. Social risks are perceived or real threats triggered by actions of others and by natural causes. The poor and marginalised communities are typically the most vulnerable to social risks. These risks also negatively impact businesses making them susceptible to social and political challenges and furthermore unsustainable in the long run. Businesses often also contribute to creating social risks by violating rights of people, providing unfair labour conditions, putting at risk health and safety of public and degrading the environment.

Oxfam India recently launched a report on Impact of Social Risks on Indian Businesses developed by KPMG. The report highlights the top social risks in India and their impact on businesses. In an index launched by India Responsible Business Forum in October 2015 policies of the top 100 companies listed on BSE were found to be lacking in some areas. Juxtaposing the findings of social risks report and the index policy gaps show some worrying signs. Here’s an attempt to highlight a few critical points emerging from the two reports:

1. Social License to Operate - Violation of indigenous people’s rights especially in the process of acquiring land for large projects pose a very pertinent risk to companies. IRBF Index showsthat 98 of the top 100 companies do not even recognise the need for Free, Prior and Informed Consent (FPIC) through discussions for land acquisition or displacement. Inadequate stakeholder engagement with local residents and not acquiring a social license to operate can lead to project delays and losses. A proposed investment of $12 bn by a foreign company in Odisha is on the verge of withdrawal after 11 years owing issues around land acquisition, environment clearance and opposition from local residents. This is one among many such instances in India. Value of stalled projects in India rose to over $11 trillion in the quarter of March 2016. A large portion of this can perhaps be attributed to community conflict around land acquisition.

2. Safe Supply Chain – A company’s supply chain is exposed to a number of risks arising especially from violation of rights of workers/ suppliers, poor health and safety conditions. IRBF index shows  that most of the top 100 companies turn a blind eye towards the rights and issues of people in its supply chain. This puts the entire supply chain at risk. A Stanford studyof the Rana Plaza collapse in Bangladesh shows that revenues of companies associated with the factories declined as a result of the collapse. This also resulted in shifting garments export business from Bangladesh to other competing countries citing workers safety concerns.  In a globalised business environment it may no longer be viable for businesses to just comply with the law of land. International standards on business responsibility and ethical trade practices are fast changing. Many Indian businesses are linked to global supply chains and therefore not immune from changes in international standards.

3. Responsible Investments - The capital market is changing rapidly and is slowly becoming more responsible and transparent. There is an increasing trend among institutional investors and regulators to align with Environmental, Social and Governance (ESG) norms. This change is more evident in emerging markets. More than 50% of the Dow Jones Sustainability Emerging Markets Index companies are now from Asia. A recent survey conducted by UN Principles of Responsible Investment (PRI) shows that there is high awareness on ESG issues in emerging economies like Brazil and South Africa. Institutional investors like pension funds have started integrating the UN Guiding Principles for Business and Human Rights (UNGPs) in their investment decisions. In 2007 a mining major faced investors’ wrath for human rights violations in its India operations. Recently Norges Bank Investment Management (NBIM) made public its expectations from companies to respect human rights and address human rights issues in their business practices. In 2014 NBIM had close to $8 bn invested in Indian companies. Foreign Portfolio Investors (FPIs) control close to 40% of India’s equity market. In a not so distant future accessing capital will be difficult for companies that do not conduct business responsibly.

Oxfam India aims to influence the private sector in India to adopt responsible and inclusive policies and practices to end inequality. The index and the social risk research help us in achieving this goal.

 

Written by Namit Agarwal, Private Sector Advisor, Oxfam India

 

Image source: http://theblacksnapper.com/wp-content/uploads/2015/12/The-Importance-of-Minimizing-Risks-on-Construction-Projects.jpg

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1Making Growth Inclusive - Table 3.5(a): Recognition of the need to assess business impact on communities and means to minimise the negative impacts; Oct 2015

2Making Growth Inclusive - Table 3.4(a): Recognition of key aspects that contribute to an inclusiveness in supply chain; Oct 2015

3http://web.stanford.edu/~mrtanaka/Mari%20Tanaka%20-%20PhD%20Candidate%20-%20Stanford_files/rana_retailers151213.pdf

 

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