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 Matt Christensen, Executive Director, Eurosif.
Matt Christensen has served as Executive Director of Eurosif since 2002. Eurosif is the premier European think-tank and network for sustainable investment with more than 85 Member Affiliates that together represent assets totalling over €1 trillion. Recent activities of Eurosif include its 2010 edition of the EU SRI Market Study, the Emerging Markets Report, the High Net Worth Individual & Sustainable Investment Report, and successful submissions to the EU asking for improved transparency on environmental/social/governance issues by companies and investors. Matt is a frequent speaker at international events on sustainable finance matters and a member of the European Commission Coordination Committee to explore the evolution of sustainability in the EU. Matt was formerly a European Director at The Motley Fool, a leading publisher of information on personal finance and investing. Prior to that, he advised FTSE 100 clients as a strategy consultant with Braxton Associates/Deloitte Consulting. He is a Non-Executive Director to several investment funds and holds masters degrees from the Wharton School (MBA) and University of Pennsylvania (MA – International Political Economy).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Matt Christensen: Since I joined this field in 2002, the terms “social”, “ethical”, “responsible”, “socially responsible”, “sustainable” and others have been used in a multitude of overlapping and complementing ways to approach the SRI field. It is actually this richness of different views that challenges investors to perfectly define and categorise SRI – it is not easily “boxed in”.
Even if different terms are used to describe the field of SRI, I think there are two constant factors that remain important to investors interested in this form of investment: (1) A concern with long-term investment and (2) environmental, social and governance (ESG) issues as important criteria in determining long-term investment performance. For Eurosif, all of the existing and developing expressions of sustainability investing are valid approaches.
To capture these evolving dynamics and terminologies, at Eurosif we continue to use the term ‘SRI’ as the most readily acknowledged expression for this field, identified as ‘Sustainable and Responsible Investment.’ This being said, Eurosif uses the following definition of SRI: a generic term covering any type of investment process that combines investors’ financial objectives with their concerns about Environmental, Social and Governance (ESG) issues.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Matt Christensen: How ESG factors are integrated into an investment decision is what provides the distinction from more traditional mainstream investing. The disclosure of ESG data by companies is the first important step in implementing SRI investment practices. Investors that are committed to developing and implementing SRI policies are clear about how they use the ESG data disclosed by companies in their investment decisions.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
Matt Christensen: Each emerging market has its own specificities and challenges but overall, all three dimensions (E, S and G) pose possible challenges for companies to manage. Excessive resource exploitation, consumption and growing pollution patterns are among some of the social and environmental issues that companies face in emerging market economies. In addition, governance issues can pose additional challenges that companies have to face as governance in emerging market countries is often characterized by a culture of former state-owned companies, concentrated shareholder structures and weakly enforced regulations.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
Matt Christensen: First of all transparency about how ESG issues are taken into consideration when making investment decisions in emerging market economies is essential. I also think that investors face the challenge of not having access to material, comparable and timely ESG information from companies operating in emerging markets. This is not an issue only in the case of emerging markets but also in companies located in the more developed countries. In emerging markets however, this becomes more relevant as they are faced with a rapid economic growth and increasingly large populations.
Emerging Markets ESG: Eurosif published an Emerging Markets Report in December 2010. What does the report reveal about ESG reporting trends in emerging markets?
Matt Christensen: The Emerging Markets Report, with research provided by Inrate, shows that although lower than in developed markets, ESG integration by companies operating in emerging market economies is on the rise, and investors are playing a role in shaping and developing the market. Among emerging markets, South African and Latin American companies tend to be the most advanced in integrating ESG issues. Although corporate disclosure on sustainability is present in 9 out of 10 companies in the emerging markets, the Eurosif report shows that this figure drops when it comes to external verification or the adoption of standardised guidelines.
Another finding of the report show that while 42% of emerging market companies support the adoption of environmental policies, they remain weaker on implementation and progress tracking. For example, Chinese companies underperform significantly in the area of social issues integration in business strategy, with below average performances on labour and corruption policies.
Finally, the report points to a series of practices that might help guide investors to shape and develop their sustainability investment practices in emerging markets. Existing company ESG disclosure and reporting initiatives (such as Carbon Disclosure Project [CDP], Emerging Markets Disclosure Project [EMDP] of the Social Investment Forum, Global Reporting Initiative [GRI] and OECD Guidelines for Multinational Enterprises) can be useful tools for investors to facilitate the development of local corporate stakeholder capacities.