Five Questions about SRI – Weekly Expert Interview with Aldo Bonati, Head of Research, ECPI, Milan, Italy – February 4, 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 Aldo Bonati, Head of Research, ECPI

Aldo joined ECPI in 2007 and combines knowledge of systematic screening methods and international ESG standards with experience in integrating non-financial indicators in investment processes and structuring innovative, investable solutions for ECPI’s asset management and investment banking clients. Before joining ECPI, Aldo worked in the  product development department at BNL Gestioni SGR (now BNP Paribas Asset Management), in the marketing department in Citibank’s credit card and bank business units and as fund raising officer of The Association of Volunteers in International Service – AVSI, a global non-profit organization active in 32 countries. Aldo contributed to the book Sustainable Investments – Integrating traditional analysis and non-financial indicators: the ECPI and Goldman Sachs Sustain case studies. A graduate of SDA-Bocconi School of Management (MSc, cum laude, in Management of Not for Profit Organizations, 2007), Aldo also holds a master in Economics (major in international economy) of Università Commerciale Luigi Bocconi (1999).

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

Aldo Bonati:  The definition of responsible investment today is not univocal: responsible investment is a complex concept that can be tailored to clients’ needs.  Over the past few decades, a range of terms, notably ‘social’, ‘ethical’, ‘green’, ‘responsible’, ‘socially responsible’ and ‘sustainable’, have been used.  Sustainable investment has now developed past its infancy in the 1980s but is suffering the same lack of clarity that other new investment themes experienced in their development. In short, the term ‘sustainable investment’ needs re-definition. Customers, investors and financial analysts all have trouble in discerning the difference between the myriad of like-sounding terms vying for media space.  However – within the investment community – a common approach is emerging towards sustainable investment: this approach requires the integration, direct of through specialized service providers, of sustainability-related issues with the traditional financial analysis in order to gain a clearer picture of the quality of a company’s management and to better evaluate its risk-return profile.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment?

Aldo Bonati:  In a survey[1] by McKinsey, two-thirds of CFOs and three-quarters of investment professionals agree that environmental, social, and governance activities do create value for their shareholders in normal economic times.  This trend is accelerating as it is becoming obvious that many aspects previously not factored-in by the traditional financial analysis have a material impact on a company’s performance.

In the environmental field, think about the impact of the cost of carbon credits for utilities in countries regulated by an emission trading schemes (the main example being the Emissions Trading Scheme introduced in 2005 within the European Union to incorporate environmental costs into market prices).

In the social field, think about the cost, in terms of economic and brand value (not to mention the topic of licence to operate), of being involved in scandals about corruption and breach of human rights for basic materials companies operating in developing countries.

In the corporate governance field, think about the cost for financial companies of an uneven balance of power between the ownership and the management and an incentive system biased on short-term results.

To sum up, the adoption of a strategy whereby non-financial information is integrated with traditional financial analysis can provide a more comprehensive picture, i.e. based on a broader set of information, when assessing medium/long-term issuers: that is the main difference between traditional mainstream investment and an integrated approach to sustainable investment.

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

Aldo Bonati:  The most challenging cross-country, cross-industry extra-financial theme to be tackled by companies is transparency, i.e. providing adequate, comparable information to the investors’ community.

The level of corporate disclosure on sustainability issues has improved over the past years but remains on average below the standards displayed in developed countries, even if with significant differences between different countries in this group. While the majority of companies in the MSCI Emerging Market Index provide some sort of disclosures on environmental and/or social issues in their public reporting, such proportion drops when it comes to external verification or the adoption of recognized reporting guidelines (e.g. GRI).  Considering the recent development in some emerging market countries[2] through either ESG-related listing rules or dedicated sustainability indexes, positive evolutions can be reasonably expected, particularly in those countries that currently lag behind in sustainability disclosure (e.g. China).

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

Aldo Bonati:  A report recently issued by Eurosif[3] on the topic of the main ESG related risks and opportunities for investors provide a good starting point on this topic.  In the environmental field, a key issue is climate change: Carbon Disclosure Project (CDP) data shows that, among the 800 emerging market companies included in the survey, only 29% took part to the reporting initiative. Again country specificities are crucial, Asian countries such as South Korea or Taiwan stand out in this field as they clearly recognize environmental as an important element of their strategy to gain a competitive advantage and to improve company reputation. Pressure on companies is likely to grow, particularly in fast-growing countries like India and China as they are starting to play a bigger role in the international climate change regime.

Other themes of special interest are corruption, supply chain management and the respect of human and labor rights.  Obviously this is only a generalization as, again, country-specific issues play a key role.

Emerging Markets ESG:      Please introduce the CSI ECPI China ESG 40 Equity Index and explain what role ESG disclosures plays in the selection of companies included in the Index.

Aldo Bonati:  In September 2010 ECPI and China Securities Index (CSI) launched the CSI ECPI China ESG 40 Equity Index.  The first of its kind to be announced, the index identifies the 40 highest ESG-rated companies – according to ECPI’s proprietary screening methodology – amongst the already qualified reference universe of the Chinese SSE180 Corporate Governance Index. This landmark index will highlight the Chinese companies with the best Environment, Social and Governance factors amongst their peer group, allowing market participants to track the performance of China’s sustainable companies.  Chinese companies not respecting international standards and lacking transparency can expose investors to innumerable risks. The CSI ECPI China ESG 40 Equity Index is designed to be a valuable tool for investors looking for potential opportunities to invest in China, but will also encourage Chinese companies to raise their ESG standards.

Sustainability disclosures are becoming an essential factor in investment decisions. There has been a continued growing demand for sustainable investment, and this index is meant to provide information in comprehensive and meaningful way whilst also increasing transparency.

[1] McKinsey Global Survey, Valuing corporate social responsibility, February 2009.

[2] UNCTAD, “Sustainable Stock Exchanges – Real Obstacles, Real Opportunities”, 2010; World Federation of Exchanges, “Green Show for Green Markets”, Focus n. 198, August 2009.

[3] Eurosif, Emerging Market Theme Report, 2010.