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 Maciej Bazela, Founder, Applied Ethics Solutions, Houston, Texas, United States of America.
Applied Ethics Solutions is an independent consulting boutique firm which specializes in business ethics and bioethics. It aids business, financial and healthcare organizations achieve higher levels of excellence and sustainability. It accomplishes its mission through tailor-made research, formation and consulting services focused on ethics in business and healthcare. Maciej Bazela holds a Doctorate in Sustainable Consumption (from the Ateneo Pontificio Regina Apostolorum, 2008); a Master’s Degree in Bioethics (from the Ateneo Pontificio Regina Apostolorum, 2004); and a Bachelor’s Degree in Philosophy (from the Ateneo Pontificio Regina Apostolorum, 2004). He also obtained the Essential Pathways Certificate from the Responsible Investment Academy and Good Clinical Practice Certificate from Infonetica Ltd. He has studied and worked in Italy, Mexico, Poland, Spain, the UK and the USA. He has extensive professional experience in ethical screening of international companies, business ethics research, formation and consulting. He has publications in the areas of business ethics and bioethics, among them his latest book, “Sustainable consumption. Towards a new economic humanism,” IF Press, 2011. He is conversant in English, Italian, Polish and Spanish. At present, Maciej is an invited professor at the Cameron School of Business at the University of Saint Thomas in Houston, Texas.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Maciej Bazela: It may sound surprising, but there is no one classic definition of SRI. The field is so new and so fast evolving that each player tends to come up with its own definition that reflects the company’s mission, vision and service model. In order to form a solid idea about what SRI is about I always recommend having a look at the Principles for Responsible Investment (PRI), a UN-backed charter organization which is the most important point of reference for the SRI sector today. Another good starting point is EUROSIF, a leading pan European organization of socially responsible investors. Personally, however, I have adopted the definition offered by the Responsible Investment Academy since it is very concise and straightforward. The definition says: ‘Responsible investment describes a process where environmental, societal and corporate governance (ESG) issues are incorporated into investment decisions’.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Maciej Bazela: First of all, there is a marked difference in the depth and breadth of investment analysis and the number of factors that are taken into account in investment decision making. Unlike mainstream investment analysis, SRI incorporates a huge range of environmental, social, corporate governance, ethical and bioethical issues that are traditionally considered non-material or non-financial. SRI strategies pay close attention to policy frameworks, public concern issues and business externalities. Secondly, SRI has a medium to long term horizon, which basically excludes a priori any kind of short-term speculative investing. And thirdly, SRI relies on a broader definition of the fiduciary duty than mainstream investment. This change in the perception of the fiduciary duty was triggered by the Freshfields Report (2005). The report states that ‘integrating ESG consideration into investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions’. Briefly speaking, SRI offers a richer and more granular insight into investment risk and opportunities by incorporating ESG issues into investment analysis and decision making.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Maciej Bazela: In my opinion, emerging markets are struggling most with social issues and a little bit less with corporate governance and the environment. However, one needs to be very careful about this kind of generalization. The ESG situation differs from country to country and region to region. Since ‘emerging markets’ is an umbrella term which refers to quite a few very different economic realities in Asia, Africa, South America and Central and Eastern Europe, the ESG reality on the ground is different in each of these geographic zones. And yet, I would tend to say that emerging markets are becoming pretty aware of the environmental challenges, especially resource efficiency and waste reduction. Even though emerging countries still have a long way to go regarding the development of service-based economy, environmentally friendly products, fair trade and so forth, overall it is not that difficult for companies in the emerging world to make little improvements on the environmental front on daily basis. There is a myriad of things you can do: car-pooling, car sharing, elimination of plastic bags, energy efficient bulbs, recycled stationery, waste separation, etc.
As far as corporate governance is concerned, bribery and corruption are a huge problem. Unfortunately, corruption is structural in many emerging economies. Many individuals who ask for and accept bribes, especially in government, public services and administration, see bribe taking as a matter of social justice. From the other side, companies frequently see corruption as sad but necessary cost of making business. I believe that the only effective way to resolve the problem of structural corruption is through profit sharing, wage increase and performance bonuses. In other words, the solution is about more ‘carrots,’ not more ‘sticks’.
As regards social issues, I think that emerging markets are having some difficulties with the implementation of human rights, especially labor rights. Work-life balance policies are almost unheard off. Discrimination and psychological harassment are quite common at workplace. The prevailing management style is top-down with little space for employee participation in decision making, initiative-taking and autonomy. Labor and safety standards are poor. Because of extreme imbalances of contractual power and little respect for human rights, middle and lower level employees frequently feel like mere cogs in the overall corporate scheme. In many companies the best strategy to ‘survive’ is to be mute, passive, and inert. There is little room for individual initiative, open communication or creative critique.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Maciej Bazela: Corporate governance seems to me the most difficult among the three to gather relevant and complete information about. While companies like informing the public about their advancement and best-in-class solutions regarding the environment and social responsibility, they are rather reluctant to do the same on the corporate governance front. Apparently, businesses tend to think about corporate governance as a kind of inner sanctum of the organization to which only a few should have full access. As a consequence, ESG analysts frequently encounter huge difficulties in data mining on corporate governance in emerging markets. When you review companies from China, India, Mexico Russia or other emerging economies, you frequently bump into corporate web sites which provide hardly any information about the composition of the board, remuneration policies, pending litigations, risk management or sustainability strategies. Sometimes you do not even see information about the CEO or the corporate address. However, I also think that corporate governance is the Achilles heel of business worldwide. Although it is true that corporations in the developed world provide much more data on corporate governance than businesses in other parts of the world, it is quite telling that the latest business ethics scandals have been about corporate governance issues. Just think about the News of the World, Nomura Securities, Olympus, Parmalat and Siemens.
Emerging Markets ESG: What is the nexus between ethics and SRI in emerging markets?
Maciej Bazela: I think that there is a strong link between ethics and SRI in general. As I tend to see it, SRI is rooted in ethical principles, ethical values and philosophical assumptions about man, society, and prosperity. In other words, (business) ethics provides SRI with a moral foundation. SRI is a financial means which promotes ethical values, namely human dignity and health, social well-being and inclusion, peace, stability, trust, and the environmental care. At the same time, SRI serves to fight back irresponsible and unethical business practices such as bribery, fraud, discrimination, prejudice, social exclusion, environmental degradation and many others. Each provider of SRI services relies on some sort of ethics to perform negative and positive screening of securities. Ethical assumptions are particularly visible in the negative screening since this is where you need to draw ethical lines. Some SRI companies use multiple ethical screens to adjust screening services to customer preferences. This is why the SRI universe is so diverse. There are Catholic SRI products, Christian, Islamic, Jewis and others. There are Green Funds and Thematic Funds. However, the majority of SRI providers move along the lines established by the UN Principles of Responsible Investment, UN Global Compact and other UN Agendas which always refer back to the Universal Declaration of Human Rights.
Regarding the nexus between ethics and SRI in emerging markets in particular, I would say that it is theoretically strong and practically weak. Let me explain this apparent contradiction. I think that the nexus is strong because ethics is implicit in SRI methodologies. One way or the other, ethics is the cornerstone of responsible investment. And yet, the nexus is weak at the same time. Why? Because business ethics still is a rather new thing in emerging economies. Emerging markets are yet to develop a broader social awareness and consciousness regarding ethics in business, ethics of consumption and environmental stewardship. As you now, the demand for SRI products is rather weak in emerging economies. Ethical funds or socially responsible investment consulting are almost non-existent on the level of retail and investment banking in Mexico, Poland or other emerging economies. In a nutshell, to unleash the potential of SRI, you need to have a strong ethical public consciousness first. Such an ethical awareness will translate then into consumer demand, investor interests and government support. There is a lot of work to be done on that front. (Business) ethics consciousness in emerging economies remains low because of various reasons, namely toughness of daily life, structural corruption, yawing social gaps, high unemployment, lack of social mobility, cronyism, and low wages.