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Why Businesses Should Focus on ESG?

The world has changed in many fundamental ways especially in the last 25 years. I am not referring to technology-led transformation or geopolitical shifts, this piece is about Environmental, Social and Governance criteria – collectively referred to as “ESG”.

Environmental Criteria

 

Environmental costs, which were for long viewed by economists as “externalities”, are now an important consideration in decision-making by governments and business leaders. Given the devastating effects of widespread environmental degradation and climate change, countries around the world are taking concrete actions to limit further damage; many are setting “net zero” emission targets for individual sectors over the next couple of decades. As a result, new legislations are being enacted that require businesses to act in certain ways and desist from other kinds of actions. Arguably, this is the biggest facet of change globally.

Social Criteria

 

The second area of change is that various forms of social injustice are no longer being tolerated. While there were always rules against such inequities, there is now a greater cost imposed on organizations that violate these rules- not just by governments and regulators, but also by consumers, who choose to shift loyalties towards brands that exhibit greater sensitivity to social causes. By definition, social injustice covers a broad range of issues that includes exploitation of children, women or certain races (e.g., the Uighurs); not providing employees good working conditions (physical environment, denying employees time for bio-breaks and rest, harassment at the workplace etc.); discrimination against people with disabilities, gender, age or marital status; even selling goods that are not safe or bad for health arguably fall under this category.

Governance Criteria

 

The thrust on “governance” is the third major driver of change. It is not as if rules and regulations did not previously exist to prevent breakdowns in governance. Yet, there are a number of examples from around the world that showcase bad governance: from companies in South Korea, Japan, the USA and Europe to the ongoing matters at the NSE and BharatPe in India.

 

Why ESG Adoption is Crucial?

 

In recent years, various members of business ecosystems worldwide, including enterprises, investors, regulators and the general public have become far more aware of the importance of compliance with “ESG” norms and standards. They are much less willing to tolerate breaches in an organization’s “ESG” conduct.

At one level, companies that do not do well on “ESG” parameters are more likely to face explicit financial penalties (e.g., carbon taxes). But just as important are the hidden costs that will increasingly need to be borne by ESG laggards. Perhaps the most important is the reduced access to capital because both banks and PE/VC firms are incorporating ESG criteria into their funding/ portfolio strategies.

On the demand side, many consumers (especially from the younger generations) are more conscious of brands that fare better in terms of their commitment to ESG and this, in turn, shapes their purchase decisions. Brands can quickly lose market share if they do not raise their ESG game.

As shown in the chart below, data over the past decade reveals that companies that have successfully implemented ESG strategies have consistently performed better than other global companies that have not paid as much attention to ESG.

 

Source: Stoxx.com quoted in https://sphera.com/spark/the-importance-of-esg-strategy/

This out-performance can be attributed to a combination of factors, including faster top-line growth, sustained cost reductions, higher employee productivity and reduced employee attrition and of course, fewer instances of fines/penalties for non-compliance. Investment decisions and technology choices that are guided by ESG considerations will drive a more efficient allocation of capital; in turn, this will boost ROCE (Return on Capital Employed).

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

 

Start Your ESG Journey Right Away

 
Someone quipped that the best time to plant more trees was years ago, but the second-best time is now! It’s not too late for you to begin your ESG transformation. But make sure you do it as a well-structured program, and not merely a hotch-potch of initiatives that have no clear owners, goals or measures and therefore cannot be sustained.

 

To report ESG performance, you can take the help of commonly used frameworks such as the following:

  • UN Sustainable Development Goals (SDGs)
  • Global Reporting Initiative (GRI)
  • Sustainability Accounting Standards Board (SASB)
  • Climate Disclosure Standards Board (CDSB)
  • Task Force on Climate-related Financial Disclosures (TCFD)

Image Credits: Photo by Photo Boards on Unsplash

While it is convenient to look at the three strands of ESG separately, in reality, they are closely intertwined. The sooner business leaders acknowledge that ESG is not a fad or a feel-good factor, but in fact, makes sound business sense, the better it is for the world as a whole.

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Consumer Protection (Direct Selling) Rules, 2021 – Tightening the Noose on Pyramid and Money Circulation Schemes

Direct selling entities, multi-level marketing and pyramid schemes have existed for decades across the globe. These entities and direct sellers lure customers into these serpentine schemes by provoking an individual’s desire to become entrepreneurs with minimum investment. In addition, COVID-19 induced lockdown proved to be a fertile ground for a significant increase in the establishment of direct selling/multi-level marketing businesses. While some operated legally, others exploited the grey areas in the regulatory framework or were outright pyramid schemes.

Whilst people were and still are jumping into the direct selling bandwagon, the existing and potential stakeholders must be aware of the caution that the Government has issued[1] and the legal landscape surrounding direct selling/multi-level marketing business. The Consumer Protection (Direct Selling) Rules, 2021 (“DS Rules”), one of the primordial tools to regulate the direct selling industry, is being examined herein.


Brief History of the Regulations on Direct Selling

With the intent to curb the menace of illegal multi-level marketing and pyramid schemes that were masquerading as legitimate businesses, back in 2016, the Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, formulated a set of guidelines titled “Direct Selling Guidelines 2016”. These guidelines were formulated as model regulations,  issued as an advisory that put the onus the State Government and Union Territories for their effective implementation. 

Taking a cue from the Central Government’s advisory, various State Governments enacted their respective direct selling guidelines – The Tamil Nadu Direct Selling Guidelines Order 2018[2], Karnataka Direct Selling Rules, 2019[3], Maharashtra’s Guidelines for regulating the business of ‘Direct Selling’ and Multi-Level Marketing (MLM)[4] enacted in 2019, West Bengal Direct Selling Guidelines, 2018[5]. While some State Governments embraced the central government advisory and implemented guidelines on the lines of the DSG 2016, not all States followed suit, resulting in a lack of uniformity and regulation across the country.

With this brief history, let us understand the recently enacted Consumer Protection (Direct Selling) Rules, 2021 under the Consumer Protection Act, 2019, which is intended to operate as a bulwark against pyramid schemes established in India or offer goods and services to customers in India.


Consumer Protection (Direct Selling) Rules, 2021

 

1. Overview 

The Consumer Protection (Direct Selling) Rules, 2021 came into force on December 28, 2021, to prohibit participation and/or promotion of pyramid schemes and money circulation schemes[6]. While the new DS Rules do not define direct selling as compared to the DS Rules, 2016; the term direct selling entity has been defined as “principal entity which sells or offers to sell goods or services through direct sellers, but does not include an entity which is engaged in a Pyramid Scheme or money circulation scheme[7]. The exclusive definition is made to limit the application of the Act only to pyramid or money circulation schemes.

A pyramid scheme has been defined as “a multi-layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment or action or performance of additional subscribers to the scheme, in which the subscribers enrolling further subscribers occupy a higher position and the enrolled subscribers a lower position, resulting in a multi-layered network of subscribers with successive enrolments[8]. And, money circulation scheme is defined as “means the schemes defined in clause (c) of section 2 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (43 of 1978)[9].

The obligations under the DS Rules can be broadly categorized into:

  • obligations of direct selling entities;
  • obligations of direct sellers; and
  • duties of direct selling entity and direct seller.

Before analyzing various obligations under the DS Rules, it is pertinent to note that the DS Rules are applicable to any entity offering goods and services to consumers in India, whether or not such entity is established in India[10] and such an entity is mandated to maintain records such as charter documents, tax registration documents, income tax returns, financials, etc.[11] Further, direct selling entities must comply with the provisions of the DS Rules within ninety (90) days from the date of its publication.[12] It is pertinent to note that, the Consumer protection (e-Commerce) Rules, 2020 apply to both the direct sellers and the direct selling entities[13].


2. Obligations under the DS Rules:

Among other things, every direct selling entity shall[14]:

  • have a physical office in India.
  • Keep their website updated including details of its nodal office, grievance redressal officer and mechanism, management, products information including price and such website shall also explicitly provide name, address, contact details, complaint tracking mechanism, return, refund and warranty, payment-related information.
  • obtain all relevant registrations, including PAN and other tax registrations.
  • obtain a certificate from a company secretary for all information provided on its website.
  • Make just, fair and equitable written contracts with its direct sellers for dealing with the entity’s products and services.
  • ensure its direct sellers have verified identities and physical addresses.
  • comply with the Legal Metrology (Packaged Commodities) Rules, 2011.
  • store personal data within India.

Among other things, every direct seller shall[15]:

  • Provide full information about the direct selling entity, nature of goods and services, terms of purchase, return and refund, warranty, etc.
  • Provide an order form with various details about the direct seller and the direct selling entity.
  • Protect the sensitive personal information provided by consumers.
  • Not approach a consumer without his/her identity card and prior approval, provide literature to prospects without approval, make claims inconsistent with claims as authorized by direct selling entity.

 

3. Duties

Under Rule 7 of the DS Rules, direct seller and direct selling entity shall:

  • ensure terms of offer are clear, make true representations, not use unfair or deceptive trade practices, not indulge in fraudulent activities, not portray direct selling as market research.
  • not indulge in mis-selling products or services to customers.
  • charge any entry or subscription fee.
  • ensure orders are delivered within the proposed delivery date at the time of purchase.
  • follow provisions of the Legal Metrology Act, 2009 and rules framed thereunder.
  • Not induce customers to make purchases based on the representation that they can reduce or recover the price by referring prospective customers to the direct sellers for similar purchases.

Any contravention of the DS Rules will attract penalties and the legal procedures enumerated under the Consumer Protection Act, 2019[16]. Further, the DS Rules require the State Governments to set up a mechanism to monitor or supervise the activities of direct sellers and direct selling entities, which fortifies the effective implementation of the DS Rules.


Bringing In Uniformity 

 

The Direct Selling Guidelines 2016 were implemented during the time when FTC (Federal Trade Commission) of USA filed a complaint accusing Herbalife Nutrition Ltd. (a multi-level marketing (MLM) corporation) of deceiving consumers about how much money they could make selling its products, noting that most Herbalife distributors make no money at all[17]. The FTC also announced that Herbalife later agreed to pay $200 million to reimburse consumers who lost money on its nutrition supplements and planned a major restructuring of its sales and distribution practices[18].

The Direct Selling Guidelines 2016 which were issued as an advisory by the Central Government, were not implemented by all States resulting in a lack of uniformity, certainty and effective protection from the perniciously proliferating pyramid and money circulation schemes.

The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent.  Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction since consumers can now approach the consumer protection forums for effective redressal of grievances.

References: 

[1] RBI cautions Public against Multi Level Marketing Activities: https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=1514, January 01, 2015.

[2]https://upload.indiacode.nic.in/showfile?actid=AC_TN_85_1061_00003_00003_1553515101944&type=rule&filename=trekking_rules.pdf

[3] https://idsa.co.in/resources/media/guidelines/1609826052_Direct%20Selling%20Notification_0.pdf

[4] https://idsa.co.in/resources/media/guidline/1563874609_Maharashtra%20DS%20Guidelines_0.pdf

[5] https://www.idsa.co.in/resources/media/new/1596788872_West%20Bengal%20Direct%20Selling%20Guidelines%202018_0.pdf

[6] Rule 10 of the Consumer Protection (Direct Selling) Rules, 2021.

[7] Rule 1 (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[8] Rule 1 (i) of the Consumer Protection (Direct Selling) Rules, 2021.

[9] Rule 1 (f) of the Consumer Protection (Direct Selling) Rules, 2021.

[10] Rule 2 (2) of the Consumer Protection (Direct Selling) Rules, 2021.

[11] Rule 4 of the Consumer Protection (Direct Selling) Rules, 2021.

[12] Proviso to Rule 2 (1) (d) of the Consumer Protection (Direct Selling) Rules, 2021.

[13] Rule 9 of the Consumer Protection (Direct Selling) Rules, 2021.

[14] Rule 5 of the Consumer Protection (Direct Selling) Rules, 2021.

[15] Rule 6 of the Consumer Protection (Direct Selling) Rules, 2021.

[16] Rule 13 of the Consumer Protection (Direct Selling) Rules, 2021.

[17] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

[18] https://www.npr.org/sections/thetwo-way/2016/07/15/486174340/herbalife-agrees-to-pay-200-million-to-settle-complaints-it-deceived-consumers

 

Image Credits:

Photo by Tara Winstead from Pexels 

The new Rules shall now result in a uniform application of the law across the country, thereby standing in alignment with the legislative intent.  Additionally, by bringing the direct selling entities and direct sellers under the ambit of Consumer Protection Act, 2019, the Central Government has taken a step in the right direction the consumers can now approach the consumer protection forums for effective redressal of grievances.

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Sports and Business: Long Term Thinking is Vital for Success in Both

India’s sportspersons have returned to India after a fantastic performance at the Tokyo Olympic Games. Neeraj Chopra’s javelin throw gave India its first ever gold medal in athletics (and second in an individual event). Weightlifter Mirabai Chanu and wrestler Ravi Dahiya won us two silver medals, while boxer Lovlina Borgohain, badminton player P V Sindhu, wrestler Bajrang Punia and the men’s hockey team won bronze medals. Our overall tally of 7 medals is the highest at any Olympics. Overall, a very creditable performance the nation should be proud of.

As a proud Indian, I too am hopeful that the exposure and “big stage” experience gained by our sportspersons in Tokyo, combined with better training, practice infrastructure and facilities will help India better its 2021 performance. However, I worry about the flurry of speculative discussions in the media about how many medals India will win at the 2024 Paris Olympic Games.

The media is full of expert analysis and recommendations on what the government and sports federations need to do to ensure a higher medal tally in 2024. Sportsperson I am not; nor am I a seer. Therefore, I do not know what individuals and teams need to sustainably enhance their performance and win medals for India in the future. But I do know that ad hoc actions will not suffice.

A structured, long-term approach is essential for sustaining success in sports and business

I see a clear parallel between the world of sports and the corporate world, with which I am more familiar. No matter how talented and skilled an individual athlete or player is, skills alone are not enough to win him/her a medal. They need the right coaching, top quality training facilities, regular opportunities to compete with the world’s best, the right nutrition, inputs on biomechanics, mental conditioning etc. Having all this also does not guarantee a medal-winning performance, because, on the day, anything can happen.

Similarly, individual brilliance or an innovative new idea or product alone will not guarantee success in business. India needs to strengthen its ecosystem for business, with a particular emphasis on startups and young ventures. Coaching and mentoring to give better shape to business ideas, access to risk capital, support during the early stages of the business, tax breaks, the right kinds of sector-specific laws and regulations that will help businesses become viable sooner are all elements of what our business ecosystem requires.

Just as world-class sports infrastructure cannot come up in every state or city in the next year or two, incubators cannot come up everywhere. Junior talent identification and nurturing programs too can take 8-10 years to produce top-class sportspeople who are ready to compete on the global stage. Even if physical infrastructure comes up, finding equally qualified coaches for all locations will not be easy.

Although we know that Artificial Intelligence, Cybersecurity, Clean Energy, Electric Vehicles etc. are all critical emerging areas, it is naïve to expect that overnight India will become a leader in these sectors. The same is true of our performance in sports as well. Countries prioritize participation in those sporting events that afford them their best chances of winning medals; India is no exception. This same thinking needs to be applied to business as well. The first step is to mindfully identify sectors that are critical to our future- for example, clean energy, healthcare, space, drones, defence equipment (aircraft carriers, submarines, 6th generation fighter aircraft, anti-missile systems), electronic chips etc.

Then, just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. Within the national business ecosystem, smaller regional ecosystems need to be created across the country, based on resource availability and other strategic considerations. Individual states must compete with each other to build such ecosystems and attract the best entrepreneurial talent. Doing all this will definitely give India a stronger and more vibrant domestic industry, besides acting as prime movers for overall socio-economic development, employment generation and GDP growth.

Spotting and nurturing young talent in various sports must be part of our education system

Also, our education system has focused on academics, with sports and other activities labeled as “extra-curricular”. This needs to change in two ways. First, right from the primary school level, children must be encouraged to participate in different sporting activities. Trained teachers and specialist staff must spot talent and at the right ages, enable specialized training. This obviously must be done with the parents’ active cooperation. Second, for super talented children who wish to pursue sports as a possible career option, specialized institutions must be set up (either by state/central governments or in PPP mode). Children in these institutions must be given extra coaching and training, while also being allowed to pursue a basic level of academics that will help them once their sporting careers end. Seasoned athletes must be invited to train at these facilities so that young aspirants can learn and benchmark against the country’s best. The National Education Policy 2020 seeks to make sports and physical fitness more central to school education, but the proof of the pudding lies in the eating. Only time will tell how seriously this is taken in a country that values grades and marks over excellence in a chosen field.

Concerted action is essential not just for a US$5 Trillion economy but also a richer medal haul in the future

Winning in sports is not easy- and neither is succeeding in business. If we are not quick to act, flight of entrepreneurial talent to other countries is a distinct possibility, and in time, our businesses (and athletes) may end up competing with rivals who also had their origins in India- and could perhaps have been part of our sports contingents and GDP. What is worse, we may be ranked as poorly on innovation in critical areas as we have been in world sports.

Just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. 

 

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