The Natural Quotient: A Sustainability Metric for Business

This Diwali, I would like to present readers with a new idea and food for thought:

Financial Sustainability: As an investor and equity analyst, our work is to understand and analyse companies. With 5-7 years data and history of performance of the firm, we try to look into the future for 2-3 years to see where the firm is going. When we look at the balance sheet, we try to see how strong it is today, and also in a multi-year context, if it is weakening or strengthening over time.

Another way of expressing this is to say that we analyse firms for their financial sustainability. Firms are created in an economic, legal and industry context, where they should comply with rules, while executing their strategy, business plans and operations. The pricing of the products or services is done by the firm in such a way that they are able to generate a profit after meeting all operating and establishment costs.

Natural Sustainability: However I notice a certain disconnect. Our business and economic context is not in step with our environment, natural resources and in general, nature. We are aware of problems in our environment such as water shortages, pollution of water and air, and non-decomposing waste. The weather is incrementally worsening year after year. Firms need to comply with environmental norms, but it seems as if even if they did, it is grossly inadequate. I believe that not enough is being done by all of us, both govt and consumers, for natural sustainability. This is not a problem that can be just handed off to the govt as their responsibility. We ourselves are the eventual victims. Firms need to not just be financially sustainable, but also Naturally Sustainable.

Let us step back and relook at things. If we look at an isolated forest or an uninhabited island, we find that nature balances out things in that environment. The local trees and plants that are suitable are able to grow. The animals consume plants and other smaller animals. They have a hierarchy that balances their numbers. Nature finds a way, and the various elements become one with nature.

The Challenge of, by, and for Humans: With human numbers growing and our usage of the environment to meet our needs, we have intervened in nature’s way. We are generating solid, liquid and gas waste and pollution that nature often cannot decompose and revive. Deforestation, water shortage, ocean acidity and global warming are the results. Air pollution is affecting day to day breathing in some cities.

While it is sufficient as a stock analyst in the business context for us to think of companies and make predictions for a 2-3 year period, in the environmental context we need to look out over a longer period. We can see that in 10-15 years many cities will be unliveable, and regions polluted. Nature’s fury, as seen in floods due to rains in Mumbai and Chennai, and due to cyclones in New Orleans and Fiji, will worsen, an unpredictable but very destructive effect. It’s getting hotter. Ice is melting. As aware consumers we need to stop this destruction.

Renewables are Natural: When it came to power generation, we have discovered that renewables are the way out. Fossil fuels have powered our devices and engines for many decades now, but at current numbers, the cost to the environment is huge. Renewables provide a kind of return to the natural way. Like to nature, the sun and the wind will power our energy needs, with minimal damage and pollution. Renewables coupled with electric powered vehicles and homes will complete the green cycle.

Similarly in other sectors, we need to quickly return to nature’s way. Companies, organizations and societies must treat sewage 100% before releasing it so there is zero poisoning. Water must be conserved. Effluent gases must be treated before release. Solid waste such as plastics must be decomposable or collected and recycled. The objective is zero waste, zero pollution, zero impact on environment.

The Cost of Natural and Natural Quotient Tax (NQT): Today when we pay for a product at a shop, we do not incorporate the full cost of this conservation, treatment and ecological aspects. Because many times, this is just not being done. Some products are directly damaging to the environment – eg. some plastics, dangerous gases, CFC, etc. Every fossil fuel based car is releasing gases and heat. Other companies have manufacturing processes and by-products that are damaging to the environment.

The solution is to classify every product on sale and add a Natural Quotient Tax (NQT). This fraction is a markup on MRP of the product.

  • So renewable power from solar panels would have a NQT of 1.0 (assuming the mfg process is also eco-friendly). So MRP (prior to analysis) X 1.0 would give an unchanged price.
  • However a damaging product such as a convenience plastic bag would have a quotient that includes the cost of collecting the waste bags after usage and recycling them or safe disposal. Either the firm undertakes the collection and recycling post usage, or takes responsibility by paying for it and ensuring it is done by an agency. The NQT here may (as example) be 6.0. So if the MRP was previously Rs 5, the NQT price for consumer would be 5X6 = Rs 30. (This is an option to banning the product).
  • The supply chain of mfg companies today extends from raw materials and component maker vendors to wholesale and retail. The NQ supply chain would encompass the raw material, resource and pollution monitoring of the raw material and component maker vendors (relevant for purchases) to self-monitoring, to tracking the product usage and disposal by customers.
  • Like Chartered Accountants for financials, NQ trained Accountants will have the task to calculate the NQT specific to a product, a division and the company. There may be people skilled in this, internal and external to corporates.
  • The GST format for tax collection, responsibility and sharing can be the format for allocation of NQT among suppliers and vendors.
  • In a B2B context, or even a multi consumer product context, once again the eco footprint of the company would be analysed to decide a flat NQT for the firm which has to paid annually. It may be left to the firm to generate and allocate the resources needed to pay NQT.
  • While different countries may have different attitudes to the NQT concept, it must first be implemented domestically in India and other concerned countries. As a next step it can be extended to exports and other countries.

It is not my objective to burden ourselves with another Tax. I think we need to pay a bearable amount now, rather than face massive hardship and unbearable pain in future. It is also vital for us to become sensitive to this issue. The Indian agencies initially only need to spread this concept and idea as a measure of Environmental Friendliness, even before implementing the actual NQT tax. The concerned firms and executives will be able to calculate the NQT and Pricing impact, for their own firms. This will itself help drive the necessary change in behavior into business. Companies are today concerned only with their business economics and profits, while complying with rules. However it’s time we took a longer time view, and also focus new products and human innovation on living in harmony with nature. It’s my firm belief that NQT incorporates carrots and sticks that will help change our collective behavior.

Lets be kind today, to ourselves

My family is celebrating a noise free Diwali this year. I hope that with our actions, future generations will also live in this safe environment.

Here’s wishing you a wonderful, prosperous, peaceful Diwali and year ahead.

Regards,
Punit Jain
Founder, JainMatrix Investments, www.jainmatrix.com 

To see more environment sensitive material, see:

  1. The 11th Hour (film)
  2. Before the Flood

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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