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 Sumantra Sen, Founder and Principal Researcher at Responsible Investment Research Association (RIRA), India.
Sumantra Sen is a Chartered Wealth Manager with over 17 years experience in global capital markets and wealth management. In his recent assignments, he has led large teams of analysts engaged in portfolio analytics, wealth structuring and investment research in the institutional, private and premier client space. He is an active member of the Network for Sustainability in Financial Markets and the United Nations Principles for Responsible Investments (PRI) Academic Network. He is the Founder and Principal Researcher at Responsible Investment Research Association (RIRA), which focuses on research and advocacy around mainstreaming of ESG factors into institutional and private investment management. Sumantra holds a MBA degree and is a Fellow Researcher at Management Development Institute, India. He is a Fellow at the Corporate Governance & Sustainability International Group, Leeds Metropolitan Business & Law School, United Kingdom; is a fellow member at Institute of Directors, New Delhi and is the Honorary Convener of ESG initiatives at the Academy of Corporate Governance.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Sumantra Sen: The traditional definition of SRI still holds good- as an investment strategy that is not centered on pursuit of short or medium term financial returns but is more focused on creating a positive impact on inclusive growth and well being of the society at large. Just that in contemporary terms, this strategy need not be looked as a moral or reputational stance of select investors and should increasingly be seen as an enabler for broader and sustainable growth of companies/ countries.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Sumantra Sen: When you look at them closely, you realize that some of the factors that are at the heart and centre of the SRI strategy should ideally be considered by the main stream investor, as well. The mainstream investor may not be championing an environment cause or human rights, but should definitely be filtering in or filtering out the companies that manage them well or those who fail to do so, respectively. The distinguishing aspect, however, is that mostly the ideal discussed above is not followed for various reasons- shorter term horizon, cost of compliance and the gaps in the guidelines or regulations. More importantly, the objective of the mainstream investor is to enhance the financial returns- the measurement on other vectors can at best be a secondary metric. For mainstream investment these factors, in most cases, are items on a check list being watched more from compliance stand point rather than as components of the core strategy.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in India to manage?
Sumantra Sen: In my opinion, the social theme is and will continue to be the most challenging for companies in India. In fact, not just for the companies but also for the administration and policy makers. In spite of all the economic reforms and growth, India is still plagued by a large percentage of population living under conditions of poverty leading to an ever increasing inequality. The benefits of growth are concentrated to a small percentage of population, which apart from obvious implications will also result in saturated markets inhibiting business and economic growth. Further, as more people from rural areas from migrate to towns and cities in search of better employment, there is a visible stress on the infrastructure capabilities. This widening gap between demand and supply of infrastructural services including basic services such as drinking water, sanitation, education and basic health services will have a devastating impact on quality and productivity of human resources available.
The India story is built on its people. For this story to continue in the coming decades, the investment in developing human capital- its productivity and well being should rank as top priority for the companies.
Second on the list, and quite close when we talk in the context of the small and medium enterprises will be the environment factors. Some of these entities have survived in spite of not meeting the standards due to lack of clear guidelines or ineffective implementation of the same. In a more stringent regime, many of these companies will find it extremely difficult to manage the compliance requirements.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Indian to analyze?
Sumantra Sen: It has to be social yet again. The disclosure of data on the other two- Environment and Governance- has been more objective and the quality of the same has seen improvement as well. There is a serious need to re-look at what are we trying to cature as information for assessing the ”S” factor and how do we convert the same into comparable data.
Although the overall governance and specifically the issues around corruption continue to be major watch items, India’s progress in the area of corporate governance has been satisfactory. Thanks to the reactive measures post the scams right through the start of the decade and the global financial crisis, corporate governance and the methods to track the same have been cascaded well. India had its own wake up call post the Satyam saga and there have been significant steps taken by the regulators/ policy makers as well as companies. Independent directorships and complete disclosure- including extra financials- are the areas of development, which the institutional investors can continue to drive adoption by the corporates in India.
Emerging Markets ESG: How will Responsible Investment Research Association (RIRA) India contribute to improving ESG reporting in India, qualitatively and quantitatively?
Sumantra Sen: RIRA is actively partnering in the creation of a collaborative platform for all the stakeholders to have a fruitful dialogue on inclusion of ESG factors into financial markets. Qualitatively, it will work closely with the regulators, media and other partners in generating wider awareness amongst investors as well as investee companies about the long term opportunities and risks associated with the ESG factors. It will take part in the bottom-up as well as a top-down approach to mainstreaming ESG- encouraging voluntary disclosure of extra financials by the companies and contributing to the enhancements in the policy framework.
CSR is a practice that is well understood in India and there is a general acknowledgement that the ESG factors do play a significant role as long term value creators or risk mitigants. RIRA, working closely with the leading content providers and experts will aim at providing quantitative research inputs and relevant best practices to investors, investment practitioners as well as companies. Therefore, it will make efforts towards taking corporate responsibility from the reputational, stand- alone and subjective state to a more objective, integrated and strategic level.