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 Marieke de Leede, Impact Investment Analyst, SNS Asset Management, Utrecht, The Netherlands.
SNS Impact Investing is the development investments entity of SNS Asset Management. Through its professional funds it invests in social development all over the globe, and aims to combine a market rate return with a demonstrable contribution to a better world. SNS Impact Investing creates value for its clients, for the investees and for society by developing, promoting and/ or distributing impact investment solutions. Impact investment solutions are typically accomplished by way of funds, but may also involve impact investment mandates and impact advisory services. Marieke de Leede has been working for SNS Asset Management since February 2008, first in the Environment, Social and Governance research department and currently as an Impact Investment Analyst. During the last three years she focused on the integration of extra-financial criteria in investment decisions for impact related funds, such as investments in microfinance and sustainable agriculture in Africa. Her inspiration to contribute to equal development opportunities started when she did voluntary work in Ghana and set up her own development project. Marieke obtained a Master in International & European Law and a Master in International Human Rights Law, specialising in human rights and business and was selected for the Swiss Master Class in corporate social responsibility at the Université de Lausanne. She attended a Social Performance Management Training for Microfinance, worked for two months at a microfinance institution in Kenya, and is actively involved in impact-related discussions and initiatives at the Consultative Group to Assist the Poor (CGAP), the Global Impact Investing Network (GIIN), the Netherlands Platform for Microfinance and the Social Performance Task Force.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Marieke de Leede: Responsible investment can be defined as the integration of social, ethical, environmental, governance and other extra-financial information in the investment process. What this means in practice depends on the theme and the type of investment. In general I believe an investment is socially responsible when capital is allocated to an entity or project that can use the capital to improve or expand its operations in order to foster (social) development. At the same time, the investment should comply with internationally accepted standards, such as fundamental human rights and labour standards as well as environmental conventions. In addition, involvement in controversial activities, such as the production of weapons and drugs or other unethical business activities should be avoided.
SRI is a way of making investment decisions in which social and environmental standards are carefully assessed. Socially responsible investors distance themselves from investments in companies or entities that harm people or the environment. Many investors describe SRI as a “do no harm” approach, whereas others clearly focus on adding social value with the investment made.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Marieke de Leede: Its holistic approach. Rather than solely focusing on financial ratios, social responsible investors take into account the broader picture. In my view, mainstream investors sometimes have a narrow-minded approach, focusing mainly on returns instead of the governance, background and impact of a business. SRI demonstrates that the performance of a company is influenced by the management and good corporate governance, and that profits depend on the impact of certain products on the environment and surrounding communities. Where mainstream investors often assess financial and non-financial criteria as two different sets of indicators, socially responsible investors have a more integrated approach in which extra-financial criteria are taken into account in the entire investment process. SRI tries to demonstrate that those extra-financial indicators influence the profits of a business, particularly over the long term. For example, companies that negatively impact the environment will face public criticism, which can influence their future profits.
In addition, SRI has an awareness-raising function. The discussion about responsible investments sends a signal to society that a successful company operates a business that produces more positive results for society than just generating good profits. Through SRI, companies can be encouraged to perform responsibly, but also to generate positive impact on the environment and people involved. I believe SRI can have an important role in educating society about the responsibilities of the private sector. Not only governments, but also companies can be hold accountable for social and environmental developments on a global scale.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in African emerging markets to manage?
Marieke de Leede: I think it is impossible to generalize this for all sectors in all African countries. For a company involved in agricultural activities, the environment can be the most challenging theme to manage. Nevertheless, if land issues are involved, responsible management of land ownership can be more challenging than the management of its impact on soil and water contamination. Which extra-financial theme is the most challenging really depends on the sector and the type of company (SME, multinational, etc.). Corruption regrettably still is a common feature in many African emerging markets, which might make governance the most challenging theme overall. Moreover, I believe good governance is the foundation for managing social and environmental challenges. Without strong management, a solid management information system and proper checks and balances, it will be difficult to control the social and environmental impacts of your operations.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in African emerging market companies to analyze?
Marieke de Leede: Again, this depends on the type of investment and the country in which the investment is made. Sometimes the environmental or social impact of a company can be very obvious, but sometimes it takes a lot of research to find out what is going on “on the ground.” It is a major advantage to work with local (research) partners to collect data from the field. In case this is not possible, investors depend on information which is publicly available or which is published by ESG databases. And sometimes it requires the investor to do its own field research. I think social and environmental problems are more often highlighted in the media than governance issues, which are more difficult to assess from the outside. Therefore, in addition to desk research, it is key that socially responsible investors engage with companies they invest in. Engagement can create trust and provide access to insight information in the company invested in.
Emerging Markets ESG: How would you define impact investing? What differentiates it from SRI? Would you please describe the profile of impact investors?
Marieke de Leede: The main objective of impact investors is to combine a solid financial return with targeted social, ethical and environmental outcomes. Impact investors aim for a clear added value, whereas SRI often is limited to “do no harm.” Rather than not investing in companies or entities that harm people or the environment, impact investors search for opportunities to generate a positive outcome. This added value can be expressed directly by focusing on a specific positive social or environmental impact. It can also be done indirectly through the allocation of money to financial entities that did not have access to capital before in order to put them in a position to create those positive impacts. Furthermore, impact investors generally allocate capital to certain sectors or projects instead of investing in a certain company. For example, impact investors can focus on microfinance, SME finance or agricultural investments in developing countries.
Impact investors invest in social development all over the globe and aim to combine financial returns with a demonstrable contribution to a better world. Within the impact investor area there are also different types of investors. They can be broadly classified into two groups based on their primary objective. Impact first investors primarily aim to generate social or environmental good, and are often willing to give up some financial return if necessary. Finance first investors typically seek investments in subsectors that offer market-rate returns while achieving some social or environmental good.