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 collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Sonia Favaretto, Sustainability Officer, BM&FBOVESPA, Sao Paulo, Brazil.
BM&FBOVESPA S.A., the Brazilian Securities, Commodities and Futures Exchange, was created in 2008 with the integration of the Brazilian Mercantile & Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa). Together, the companies have formed the third largest exchanges in the world in terms of market value, the second largest in the Americas, and the leading exchange in Latin America. The Exchange features a vertically integrated business model, with trading, registration, netting, settlement, risk management, market data, and central securities depository services. BM&FBOVESPA’s state-of-the-art technological resources provide investors with an efficient and secure trading and post-trading environment. Among its broad range of trading products, the Brazilian Exchange offers equities, securities, financial assets, indices, interest rates, agricultural commodities, as well as foreign exchange futures and spot contracts, and acts as a central counterparty for all of its market segment through its four clearinghouses – equity, derivatives, foreign exchange and securities. Sonia Favaretto is currently the Sustainability Officer at BM&FBOVESPA and the Superintendent of the BM&FBOVESPA Institute. She is a member of the Advisory Committee for the “Companies for the Climate” Program, at the Getulio Vargas Foundation, and President of the Deliberative Board of the Corporate Sustainability Index (ISE).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Sonia Favaretto: BM&FBOVESPA believes that socially responsible investment (SRI) is part of a process of changing the world in which the old patterns of production, consumption and business are destined to die out. In our view SRI is a pillar of the so-called “new economy” because it creates value for shareholders as well as for other stakeholders. Companies that have already understood this process and are striving to include it in their business strategies are better prepared to face economic, social and environmental risks. The need to address this issue has become increasingly pressing over the years and is now comprehensively facilitated by various financial instruments in international markets. SRI constitutes a real revolution in the way we think about investment. While on the one hand investors are analyzing the issue with attention, for companies its importance derives from the recognition by investors and society in general that they are committed to social responsibility, sustainability, and the promotion of management best practice in Brazil. This recognition adds value for any business.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Sonia Favaretto: Corporate sustainability is grounded in a business management model in which operating in the social and environmental dimensions while at the same time pursuing best practice in governance interferes positively in the economic dimension by adding value for the company. This is the concept that lies behind SRI. Mainstream investment, in contrast, takes into account only or predominantly the economic dimension. By encouraging business organizations to adopt best practice in corporate sustainability and supporting investors in SRI decision making, BM&FBOVESPA doesn’t intend to enter into a dispute on the best investment, not least because this is associated with each investor’s expectations about risks and returns. Its intention in requiring transparency in the disclosure of information and the conduct of business is to contribute to the formation of ever more conscious investors.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Brazil to manage?
Sonia Favaretto: For us, the stricter the regulation of protection for shareholders’ rights, the stronger the stock market will be. And the Brazilian market has made significant progress on this front, especially with the creation in 2000 of Novo Mercado, a premium listing segment for Brazilian companies with high standards of corporate governance. With Novo Mercado, the Exchange made best practice in corporate governance a key determinant of the quality of information disclosed and hence of risk reduction. Companies understood the importance of these new requirements in adding value to the business. In other words, governance is no longer a challenge to be faced by firms. What’s more, it’s already influencing stock prices.
Environmental issues have also become much more visible in recent years, especially as a result of accidents that raise questions about firms’ environmental management as a risk factor. The UN climate change conferences and discussions about global warming have drawn the public’s attention to this problem, raising awareness of environmental issues and leading business organizations to improve their practices in this regard as a result. The environmental dimension of sustainability is still a major challenge for firms, however, because it involves changes in corporate culture, management, policies and practices.
The social dimension is the biggest challenge of all for both firms and society. In Brazil, it’s been a historical challenge, requiring joint initiatives by government and private enterprise. Social inequality is huge in Brazil. Resolving this equation is a sine qua non for consistent sustainable development.
For us the challenge is considerable, but it’s a matter of simple arithmetic: a company that adopts a sustainability agenda offers investors less risk. An organization that bases its guidelines on the principles for responsible investment and the triple bottom line (environmental, social, governance) will always be in a process of becoming increasingly sustainable, improving its management practices, services and production in all spheres of activity. Moreover, the Exchange believes firms should communicate simultaneously in the economic/financial, social and environmental dimensions, all interconnected, so as to give market participants in general better conditions to analyze the company’s performance in the reporting period.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Brazilian companies to analyze?
Sonia Favaretto: We realize Brazilian investors are increasingly discerning and demanding with regard to ESG disclosure generally. So, we encourage listed companies not only to publish sustainability reports but also to tell everyone about them. In tune with this debate, the Exchange recently issued a Report or Explain recommendation regarding sustainability or similar reports, with the aim of increasing transparency for investors. We’re recommending that as of 2012 companies state in their reference form, a mandatory document, whether they publish sustainability or similar reports, and if not that they explain why not. With this initiative the Exchange aims to make available to the public a database on sustainability practice by Brazilian public companies at Rio+20, the UN Conference on Sustainable Development to be held at Rio de Janeiro in July.
As we see it, from the investor’s standpoint the challenge is to take concrete initiatives to prioritize the sustainability agenda when allocating funds. In this way firms will realize they should work harder on this agenda because it brings returns. They need to increase the amount of funds invested in products linked to the ISE and ICO2. The indexes need to become tools capable of driving business volume. As part of this effort, in late 2011 the Exchange began offering an exchange-traded fund (ETF) based solely on companies tracked by the ISE. This enables investors to diversify their equity portfolios even if they invest small amounts. In other words, individual investors who allocate small amounts of funds to equities and have little appetite for risk can make use of this new instrument that helps them select stocks issued by companies with a clear sustainability strategy based on governance criteria, respect for the environment and social responsibility.
Emerging Markets ESG: What does sustainability mean to BM&FBOVESPA? Would you please introduce the Carbon Efficient Index and the Corporate Sustainability Index (ISE)?
Sonia Favaretto: Sustainability for us is a new management model that inspires the conduct of business in synergy with the present and future interests of both society and the planet. For the Exchange this is a “new value” (novo valor, in Portuguese), symbolized in the name of the institutional program called Novo Valor launched in 2010. The Novo Valor Program synthesizes the concepts and practices of sustainability from the Exchange’s viewpoint as a company and as the key actor in Brazil’s capital markets. When we speak of sustainability, we mean a new standard for society in which social and environmental issues are prioritized, alongside economic and financial factors. To achieve this, companies must change their approach to management, as well as to producing and consuming. We all have to change our behavior and the way we raise our children. In short, what we’re talking about amounts to changing the world, changing the foundations of our civilization. This won’t be possible overnight, of course, but we must make a start. What makes me happy is that this movement is actually under way worldwide. Its importance is steadily increasing. It’s no longer a bonus or premium. Nowadays it’s indispensable.
In this context I’d like to highlight the sustainability indexes, which are important instruments for fostering this new culture in the exchange industry. At BM&FBOVESPA we have the Corporate Sustainability Index (ISE), introduced in 2005 to track the performance of companies with a clear sustainability strategy based on governance criteria, respect for the environment and social responsibility. The ISE uses positive screening in the sense that there are no prior restrictions on companies, which can participate in the process provided they are among the 200 most traded on BM&FBOVESPA. It’s an inclusive index developed by means of a broad debate with society, because we believe sustainability is a constantly evolving topic. The ISE was the fourth stock index in the world to be developed for this purpose. Today its portfolio comprises 51 stocks issued by 38 companies in 18 sectors, with an aggregate market cap of R$961 billion (about US$540 billion) equivalent to 43.72% of the total market capitalization of all companies that trade on BM&FBOVESPA.
A more recent initiative is the launch of the Carbon Efficient Index (ICO2) in partnership with BNDES, the National Development Bank, in December 2010. Its weights are calculated on the basis of each stock’s liquidity as well as the issuing company’s greenhouse gas emissions. The prerequisite for participation is presenting an inventory of greenhouse gas emissions, which is an important incentive for companies to disclose environmental information.