What compels businesses to become Responsible Business — Regulations or Markets?

Originally published in Medium.com here

Fourteen years ago, I spent some time in Bangladesh for an internship with Grameen Bank. I lived in a working-class area in Dhaka, which housed several small garment factories then. Every morning, I would see scores of low-income women trudging their way to the garment workshops. I returned to India and the years passed. Then one day in 2013, I read about the disaster at Rana Plaza in Dhaka which took the lives of several working in the garment factory. The disaster shook that nation, and subsequently labor regulations with regards to worker safety were enacted for the Bangladeshi garment factories. Influential businessmen may have thought to circumvent these regulations, but they ended up being forced to comply when their buyers, i.e. major garment brands in the West, started pressurizing the factories from whom they sourced to ensure the workers were not put at risk. It was opportune timing, as responsible business as a concept was taking firm roots in the West then, and that included responsible sourcing; and no global brand worth its salt would risk the public-relations debacle that could ensue if it emerged that they sourced from factories that compromised worker rights. An adage was proven: When customers in the market raise their pitch, the business is compelled to listen — if only for his own longevity!

Fast-forward to 2019, and the Indian government released a draft National Action Plan on Business and Human Rights that focuses on the government’s duty and corporate responsibility towards human rights and the remedies for business-related issues to human rights. This is being followed with multi-stakeholder dialogue and consultations, to align India with the UN Guiding Principles on Business and Human Rights. But while compliance is yet to come into full force since regulations are in the early days, I get pleasantly surprised to see products ranging from cosmetics, spices or condiments on store-shelves that state on their labels that the communities who made it were the beneficiaries of inclusive growth, safer working standards or being free from the handling of chemicals or other hazardous substances. How did this change occur? Because customers in the market had already raised their pitch!

A 2018 study by market research firm Nielsen had an interesting finding. While 81% of global consumers stated that it is important for companies to improve the environment, the figure in emerging economies like India and Brazil was higher. Consumer demand is changing, led by the millennials who are set to comprise the bulk of the consumer base in emerging and frontier economies. The broader concepts of responsible business and sustainability are something producers, aiming for this target market, just cannot avoid. They need to invest to meet customer expectations and remain relevant as per the changing market forces.

So while regulations would undoubtedly trigger producers’ behavior, it is the market led by the consumers that seems to catalyze, and compel, businesses towards becoming responsible business at a faster pace.

Consumer behavior is not only changing market demand, it is also changing what the media feels are the key issues to highlight as a result of business-as-usual, say human rights or safety violations or damage to environment or social ecosystems. It is changing what the institutional investors (major shareholders) expect from the companies to protect the longevity of their investments. And it is changing the mindset of the regulators to act fast on compliance.

At the same time, businesses turning responsible remain flummoxed by the arithmetic. It is one thing to say millennial consumers are willing to pay a higher price for the better product, thus reducing the pressure to chase volumes for revenues. But market research is needed to understand how much of the products’ customer base comprises of such millennial. After all, most cosmetics, spices or condiments are age-agnostic products. And if only a fraction of the consumers is willing to pay more, then those selling at a higher-price point would end up chasing market share — a sure way to erode profitability. While research shows sustainable/responsible products outperform the sales of the traditional variants in terms of growth, how much is the proportionate volume? Reducing the price-point may hold key, and that may influence customer behavior further to compel more businesses to turn responsible.

Between regulations and market forces, the market is ahead in terms of influencing businesses in this region. Ignoring the market demand would impact longevity. As a parting thought, regulations should also look at disclosure standards for product labels. If disclosure standards are vague, businesses may use words that denote it is compliant with responsible standards without truly being so, and influence consumers inaccurately. Some of that may be occurring already!

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