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 Aurelio Garcia, Director of Research, ECODES, Spain.
ECODES is an independent not-for-profit organization, founded in 1992 to develop, manage and promote sustainable development projects and corporate social responsibility (CSR) in Spain and Latin America. The organization develops research initiatives on sustainability and social responsibility. It also designs, develops and manages innovative demonstration projects to show how changes in actions and behavior (such as consumption patterns, investments and resource utilization) can lead to significant environmental and social change. ECODES is the Spanish research partner for EIRIS and the Carbon Disclosure Project. ECODES also studies how the CSR policies of Spanish companies impact development in Latin America. It has conducted studies on bribery and corruption, human rights management, CSR and the Millennium Development Goals in Latin America. ECODES is the only organization in Spain or Latin America that has implemented and certified the CSRR- Quality Standard for SRI research. The CSRR-QS is the first Quality Standard conceived and implemented at sector level in the fields of CSR and SRI research and analysis. Aurelio García has worked in the sustainability field for 15 years. He previously was in charge of ECODES Energy, Climate Change and Innovation program, where he was responsible for the design and development of the fist carbon offset platform in Spain and Latin America, with partners in Europe, America and Asia. Currently he is responsible for ECODES’ Research Department, working on sustainability and socially responsible investment related research.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Aurelio Garcia: For us, SRI is a broad trend that is progressively including social, environmental and ethical issues as a value for investors. From this inclusive point of view, SRI is a tool to make financial markets work for society. This means that we can use financial markets to provide incentives to those companies with the best ESG practices. But it also means that we should work on transforming the financial landscape to make the markets work in a more environmental and social manner.
SRI includes a series of different strategies from those focused on ESG themes as risk prevention issues (mainstream SRI, or investment in corporations with good ESG management practices) to investments which include social or environmental improvements among their main objectives (such as impact investments).
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Aurelio Garcia: According to the previous differentiation, we can also find differences on how SRI is distinguished from mainstream investment. Mainstream SRI is aimed at those companies that demonstrate best sustainability and social practices. Those companies are ahead of the curve but not far ahead of business as usual. Their improvements are not disruptive, and they are the leaders in ESG and have a huge potential impact in attracting other companies to follow their ways.
Impact investment, on the other hand, is aimed at companies which have a clear social or environmental value integrated into their mission. This market is much smaller and so is its potential impact. But impact investment is helping to grow the seeds from which some disruptive innovations can emerge to solve everyday social and environmental problems.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South America to manage?
Aurelio Garcia: In South America, social issues are more difficult to manage than environmental issues. Human rights (including labor rights), bribery and corruption are the most challenging issues. Human rights are a sensitive issue in South America. Moreover, it is very difficult to manage human rights protection through very long and fragmented supply chain as is usually the case in South America.
Corruption is a deep-rooted problem in South America. According to Transparency International’ Corruption Perception Index for 2011, only three countries in the region received a 5 in 10 index on corruption perception. With this institutional picture, corruption is a serious risk for companies operating in South America and therefore for their investors too.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South American companies to analyze?
Aurelio Garcia: Bribery and corruption are the most challenging issues for ESG researchers. Only the most serious bribery cases that arise are in the public domain. The vast majority of the cases remain hidden by the performers. As a result, ESG researchers must rely on assessing the policies and management systems that companies have in place to prevent bribery. There is no transparency about the real situation, so performance is impossible to be assessed.
Some of the most innovative initiatives to prevent corruption have arisen in South America, mostly focused on governmental corruption. But we do not expect that it will be easier to analyze the issues in the coming years.
Emerging Markets ESG: Which trends have you observed in ESG reporting in South America over the past five years? Which drivers are pushing SRI in South America?
Aurelio Garcia: One might think that there is not much demand for corporate ESG information from South America, but global companies are listening to global investors and customers and they are adopting reporting standards such as GRI for sustainability reporting. Moreover, countries such as Brazil and Mexico have some of the first sustainability indexes in emerging markets. For a growing number of companies in these countries, sustainability reporting has become a necessity. In emerging markets, demand for ESG information is extending from global companies to all companies. This is evident in the number of Brazilian companies that have been acknowledged as global leaders in sustainability reporting in specialized forums.