Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To reflect on what SRI in emerging markets means to practitioners;
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
Mustafa Baltaci is the Executive Vice Chairman of the ISE and the Secretary General of Federation of Euro-Asian Stock Exchanges (FEAS). Since its creation in 1985, the Istanbul Stock Exchange develops and operates transparent, efficient, reliable and accessible markets in facilitating trading, liquidity and price discovery for capital markets instruments. There is a long list of products trading on the exchange i.e. stocks, exchange traded funds, warrants, government bonds, treasury bills, revenue-indexed bonds, Eurobonds, corporate bonds and repo/reverse-repo transactions. FEAS, on the other hand, is a non-profit sectoral organization composed of 34 stock and commodity exchanges, and 14 affiliate members in 28 countries. FEAS’ permanent secretariat is located in Istanbul, Turkey.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Mustafa Baltaci: SRI is simply the integration of non-financial performance into investment decisions. While choosing instruments and companies to invest in, reliance on financial elements alone may be misleading in today’s diversifying investment landscape. Corporate decisions on climate, carbon footprint, labor policies and a set of other criteria are becoming more relevant to investment portfolios. Socially responsible investment has been coined in this respect to consider environmental, social and governance (ESG) information in selection and management of investments. Alongside the conventional corporate practices, it places emphasis on consumer protection, environmental respect, ethics, green operations, human rights and so on.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Mustafa Baltaci: Main stream investment focuses mainly on financial return vis-à-vis SRI goes for highest return possible through investments that are consistent with investor’s social and financial priorities. SRI is more about recognizing and valuing how companies address their impact on society, environment, and so forth. To some accounts, SRI appeals for higher long-term wealth than mainstream investment does. Regardless of the case, there is evidently more interaction between ESG policies and investment preferences. The more we see the ESG criteria become part of mainstream investment analysis, the higher influence it will have on how public companies manage ESG issues.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Turkey to manage?
Mustafa Baltaci: A firm which delivers signs of good corporate governance would better manage its risks associated with social and environmental dimensions. So, it all starts from inside, from the core of the management apparatus. More than 90% of the local companies in Turkey are family-controlled, and this poses a challenge of the problem of poor governance. However, there is a level of orchestration among relevant stakeholders to uphold quality corporate policies on many fronts. The related ministry scrambles to encourage small and medium-size enterprises (SMEs) to adopt international standards related to accounting, reporting and control. The SMEs authority has a scheme of incentives to sponsor companies that are engaged in improving governance. In 2003, the financial sector regulator, the Capital Markets Board, set a set of corporate governance principles based on a “comply or explain” approach, on a voluntary basis. The authority ruled in 2005 to make these principles mandatory for ISE-listed firms resulting in more disclosure of corporate practices. Only recently, the regulator has amended the guidelines to ensure that ISE-30 Index companies – excluding banks – comply with stricter corporate governance principles relating to shareholder rights and board composition. Efforts for the regulatory soundness are to continue, however, the challenge for compliance remains, particularly for family businesses.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Turkey markets to analyze?
Mustafa Baltaci: IFC acknowledges in a recent report that corporate governance is the most important pillar of sustainability by investors in Turkey. This finding simply corroborates the recent institutional and regulatory undertakings. As a result, listed companies are required to post annual corporate governance reports for better transparency. ISE’s Corporate Governance Index enables investors to evaluate the governance performance of the relevant constituents. However, disclosure of performance in environmental and social dimensions is not mandatory, which makes it difficult for investors to reach out to accurate and consistent information. There is also no local ESG rating agency, even though the number of corporate governance rating agencies is rising steadfastly, particularly after the regulator’s guidelines. As another positive account, the number of companies voluntarily reporting on their sustainability performance, including all three criteria, is rising.
Emerging Markets ESG: Would you please introduce the Istanbul Stock Exchange Sustainability Index (ISESI). When will the ISESI commence operations?
Mustafa Baltaci: The ISESI is a multi-stakeholder project which builds on best practices through a sustainability benchmark for ISE-listed companies. The index will provide a platform for institutional investors to demonstrate their commitment to companies managing ESG risks. The multi-stakeholder process design of the ISESI Project has engaged companies, investors and relevant stakeholders from the Turkish market in development of the selection criteria for the Index. The sustainability criteria have been hammered out through a series of workshops and multilateral meetings. The project team, which includes international experts and consultants, is now working on the assessment body and methodology. We are planning to launch the Index before mid-2012.