Five Questions about SRI – Weekly Expert Interview with Geoffrey Mazullo, Principal, Emerging Markets ESG – New Hampshire, USA – January 7, 2011

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 reflect on what SRI in emerging markets means to practitioners;
  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interview is with Geoffrey Mazullo, Principal, Emerging Markets ESG – New Hampshire, USA.

 Emerging Markets ESG is dedicated to the analysis, benchmarking, development and promotion of reporting on environmental, social and governance (ESG) indicators in emerging markets.  This site serves as an archive for innovative research, a depository for information about projects undertaken, a calendar of upcoming events and a network to brainstorm about ideas as well as exchange information.  The mission of Emerging Markets ESG is to promote ESG reporting in emerging markets as an effective tool for boosting competitiveness and promoting sustainable growth.  Geoffrey Mazullo brings to Emerging Markets ESG comparative analysis skills, emerging markets expertise, foreign language capabilities and 18 years of international financial sector development experience.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Geoffrey MazulloSocially Responsible Investment (SRI) is a specific type of investment that is made utilizing an accountable/responsible process and aligned with a social purpose.  SRI analyzes financial and extra-financial information as part of the investment process.  Over the past five years the investment community has increasingly accepted the acronym ESG as the standard term for extra-financial disclosure, denoting environmental, social and governance data.  If a piece of data is not “purely” financial, it can be organized in one of these three categories.

I find frustrating the claim that SRI is a negative process (involving exclusion of certain industries or screening out of companies) that inevitably requires a lower level of return on investment.  Such a perspective is simplistic, like the reduction of corporate social responsibility (CSR) to philanthropy.  In fact, there are multiple SRI instruments and many SRI strategies.  The common thread of all SRI investment is undertaking the investment utilizing an accountable/responsible process and aligned with social purpose.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Geoffrey MazulloMainstream investment is driven by a clear and undiluted profit motive.  Its purpose is to maximize profit, while generally disregarding or ignoring any externalities.  In contrast, SRI aligns accountability/responsibility and social criteria with the profit motive.  Thus, it is designed to optimize profit, while investing accountably/responsibly and taking social purpose as well as environmental and governance issues into account.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?

Geoffrey MazulloNumerous emerging markets have implemented corporate governance codes during the past decade.  Many emerging markets are in transition economies which were formerly socialist; others are in countries with a stakeholder model of corporate governance.  Thus, many emerging market companies are conscious of the social dimension.  I would posit that environmental issues are the mot challenging, since disclosure regimes and international standards on a wide range of environmental issues (carbon, energy efficiency, emissions, water, etc.) are still evolving. 

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?

Geoffrey MazulloGiven the diversity of governance models/practices and the complexity of social issues, these themes are clearly challenging.  However, international standards enable benchmarking and comparative analysis.  As noted in my response to the previous question, environmental issues are more difficult to assess due to less data, only recent standardization of disclosures/reporting and the ensuing difficulties of comparative analysis.

Emerging Markets ESG:  Why is there so much debate over terminology?  Why do some insist on calling SRI “responsible investment” or “sustainable investment” or “impact investing?”

Geoffrey MazulloI see at least two reasons for the sensitivity towards terminology:  A first issue is bias.  The financial press generally has an Anglo-US bias.  The Anglo-US corporate governance model is a shareholder model.  It underemphasizes the role of stakeholders.  Many views the very word “social” with suspicion.  Thus, some in the UK prefer the term “responsible investment” and some in the US prefer “sustainable investment” instead of SRI.  The aversion to the world “social” is not only an Anglo-US phenomenon; many in former socialist countries also have difficulty embracing the S in SRI.  A second concern is the one I noted above, namely the pigeon-holing of SRI as a negative process which results in a smaller investment universe and lower return-on-capital.  I suppose that those who prefer the term “sustainable investment” see it capturing long-term value and green issues, whereas those who prefer “impact investing” see it emphasizing the impact of the investment.  I see some irony in this semantic juggling.  There are many industries which are sustainable but which have major SRI challenges.  Also, if the “impact” of “impact investing” is not social, what is it?