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, the inaugural interview in the third year of the interview series, is with Sylvia Wisniwski, Managing Director, Finance in Motion, Frankfurt am Main, Germany.
Finance in Motion is an alternative asset manager exclusively focused on development finance, and manages investment vehicles to promote sustainable economic, social and environmental development. Finance in Motion has over EUR 1.1 billion of investor commitments under management (as of December 31, 2012) leveraging development aid through public private partnerships. In line with the development mission of each fund, Finance in Motion develops partnerships with various eligible financial institutions and projects covering debt, mezzanine and equity as well as non-financial advisory services (Technical Assistance). Finance in Motion has offices in Frankfurt/Main, Germany, and in a further 10 cities covering operations in 24 countries in the Southeast Europe, Caucasus, Middle East and North Africa regions. Finance in Motion currently provides asset management and technical assistance management services to the following development finance vehicles: the European Fund for Southeast Europe (EFSE) – micro, small and medium enterprise finance (MSME finance); the Green for Growth Fund, Southeast Europe (GGF) – energy efficiency and renewable energy; and the SANAD Fund in the MENA Region – small and medium enterprise finance (SME finance) and employment creation. Sylvia Wisniwski is Managing Director of Finance in Motion since 2010. She has more than 20 years of experience in development finance in over 30 countries. Starting her career in German International Cooperation (giz), she worked as consultant for international organizations and held various management positions at consulting companies and asset managers. Sylvia holds an MA in Political Science and Sociology and an MBA from the University of Tübingen as well as an MA in International Studies from the University of Miami.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Sylvia Wisniwski: As a responsible investment advisor and asset manager, we at Finance in Motion see socially responsible investments in a broader context, and not only the social aspect of an investment in the narrower sense. By our definition, socially responsible investments must also take into account environmental aspects and governance concerns. In fact, we even go one step further than the traditional ESG sustainability factors (environmental, social and corporate governance) by adding responsible financial performance and development impact to our key metrics when assessing how socially responsible our investments are. We apply this 360° view not only when evaluating potential investees for our funds, whether we advise them or are mandated to manage them, but also when it comes to us as Finance in Motion. In our view, the concept of socially responsible investments should be clearly separated from charity and the classical CSR concept of mainstream investments.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Sylvia Wisniwski: From our point of view, the main difference between SRI and mainstream investing lies in SRI’s additional focus on impact. Mainstream investments solely deal with the classic triangle of risk, return and liquidity, whereas SRI goes a step further. Its focus on impact also influences the duration of an investment. While mainstream investments can also be very short term, responsible investments tend to be over a longer duration and rely on long-term engagements. In order to foster sustainable development, investments must be aligned with the projects they aim to finance, regardless of whether this covers financial sector development, economic development, environmental or social aspects. By taking this into account, SRI strikes an optimum balance between returns and long-term development prospects.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Sylvia Wisniwski: From our perspective at Finance in Motion, governance is clearly the most challenging issue when it comes to analysing companies in emerging markets. We see a lack of clear and transparent governance rules in many of the markets in which we do business. This is mainly the result of a missing or limited regulatory framework in the various jurisdictions. Consequently, our partners have only limited practical experience when it comes to a checks and balance system. In addition, we see that internal control checks are often minimal and arms’ length operations are not standard. This shortcoming is particularly relevant since business in developing countries and emerging markets is often based on highly personalized relationships or on clans or extended family structures. Therefore, it is essential to get a clear picture of the people involved in a company, as well as of the underlying structures and networks in which the company acts, in order to fully understand the risks involved.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Sylvia Wisniwski: As is the case for investors or investment advisors, governance is the most relevant and challenging aspect to manage for companies in emerging markets. This is due to the fact that they often operate in a challenging legal and business environment where the standards in place strongly differ from those in developed markets.
This creates a situation where social and environmental aspects come second. At the same time, stakeholders in some cases may, for economic reasons, not require adherence to specific environmental and social standards. Customers in developed markets are increasingly paying attention to these aspects, while this is not yet the case in emerging markets. When there is no demand from customers regarding the observance of environmental and social standards, there is no pressure on businesses to comply, especially if it increases prices and threatens sales.
Emerging Markets ESG: What would you recommend to other investment managers/advisors that would like to address ESG issues but do not yet do so?
Sylvia Wisniwski: As there is as yet no consistent definition for ESG, the first step for any company is to make up its mind and decide on their proprietary definition of the term. This process goes hand in hand with defining the goal to be achieved through ESG. The question to ask is “What do we want to achieve by signing up to ESG standards?” Only if ESG issues are part of a company’s culture and are supported by senior management, do they stand a chance of becoming part of a long-term strategy people are willing to buy into. In addition, ESG issues can be credibly communicated to external parties only if they are first accepted and internalized.
After having defined a common understanding, the second step should focus on implementing the ESG criteria in the investment analysis and decision-making process. When selecting adequate ESG criteria, a good place to start is with analysing the reasons for debt defaults in the past. In many cases you might come to the conclusion that insufficient consideration of ESG criteria played a major role in the default, especially when it comes to governance.
As a third step, any ESG system requires regular reality checks, i.e. an open but moderated discussion among all stakeholders about ESG matters and how the existing ESG tools should be adjusted to integrate the lessons learned.