Five Questions about SRI – Weekly Expert Interview with Piotr Kazmierkiewicz, Analyst, Centralny Dom Maklerski Pekao S.A. (CDM Pekao SA Securities), Warsaw, Poland – May 13, 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 Piotr Kazmierkiewicz, Analyst, Centralny Dom Maklerski Pekao S.A. (CDM Pekao SA Securities), Warsaw, Poland.

Centralny Dom Maklerski Pekao S.A. (CDM Pekao SA Securities) is one of the largest brokers on the Polish equities market.  It is part of the Pekao Group and indirectly part of UniCredit Group, one of the largest financial groups in Europe. CDM Pekao SA Securities offers investment products for individual customers/investors. With its support, individuals can open an investment account and trade on Warsaw Stock Exchange and 16 other foreign markets.  In addition, they can choose from approximately 150 investments funds and other financial products such as bonds, futures, options and shares.  Piotr Kazmierkiewicz is an analyst with CDM Pekao SA as well as the author of research and presentations about SRI. In his work, he strives to combine the achievements of portfolio analysis with the use of fundamental approach and SRI filters as a criterion in portfolio selection.  Since January 2010 he has been a member of the responsible investment group under the auspices of the Ministry of Economy. He graduated from the Faculty of Economics and Management of the University of Szczecin. Currently, he is working on his Ph.D. thesis in the field of the influence of CSR on the cost of equity capital. 

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

Piotr Kazmierkiewicz:  Investment itself is the process of evaluating perspectives and risks concerned with the functioning of an enterprise. In other words, SRI can be defined as the choice between the attitude of the shareholder, who extends the traditional approach to portfolio selection by adding ethical, social and environmental dimension to risk/return analysis, and the investor, concentrated mostly on the evaluation of the financial aspects of a business.                                   

Emerging Markets ESG:  What distinguishes SRI from mainstream investment?

Piotr Kazmierkiewicz:  Corporate social responsibility is a partnership dialogue between stakeholders and other interest groups, which should make them closer to their rallying point which is the sustainable development of the enterprise. It particularly refers to the investors who, by entrusting their share capital, demand in return the growth of shareholder value and its stability in the circumstances of limited access to financing, which results from reduction of risks inherent in business. In other words, responsible investment has the purpose of approximating investors to their target risk-return relationship. On the other hand, it’s essential to remember that in the moment of buying shares of any company, an investor becomes its co-owner.

From that moment, he also becomes co-responsible for all the actions done by the company as well as for their social and environmental consequences. By way of explanation, what makes SRI different from mainstream investments is the consciousness of responsibility, which relies on selection of companies acting in a socially responsible manner, that understand their influence on the environment and its dependence on it.

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

Piotr Kazmierkiewicz:  Twenty years of transformation in Poland have brought the transition from a state-controlled to a free market economy as well as great changes in the social structure. Unfortunately, the dynamic changes in the field of economy made the road towards a civil society rather rough, to such an extent that it has not been satisfactorily implemented so far.  Civil society in Poland is still limping, dominated by struggle, instead of public spirit and dialogue. That creates a situation in which financial capital availability is far greater than social capital. That is why, in the nearest future, the biggest challenge for companies in Poland is to redefine the meaning of the word “solidarity” that will help joining the spheres of business and politics as equal partners.

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

Piotr Kazmierkiewicz:  In contrast to the financial statements, which refer to the past, a deeper analysis of ESG factors gives a possibility to evaluate the perspectives of company’s development and to notice the real, non-financial threats, which can limit its value creation ability. 

Unfortunately, in the current stage of development of consciousness of Polish investors, there are more challenges than real opportunities for evaluating the level of responsibility of enterprises. It mainly results from the lack of a partnership attitude in the communication between companies listed on Warsaw Stock Exchange and minority stakeholders. According to research about the level of corporate governance of companies listed on the Warsaw Stock Exchange, conducted by GES Investment Services in September last year, we realize that the Polish capital market achieved almost as good results as the best European markets in that particular area.

On the other hand, the quality of reporting on the E and S factors is still not very reliable. In fact, in the “Social Reports 2010” competition there were only 17 reports analyzed.  This competition drew little attention from investors; of 470 voters, only one percent claimed to be investors.  The reason for this is precisely the visible difference between the reports’ range of contents and the quality of the reporting process.  Only eight of the 17 entities produced their reports in compliance with Global Reporting Initiative (GRI) standards.

Emerging Markets ESG:      At present, which SRI opportunities exist in Poland for individual and institutional investors?

Piotr Kazmierkiewicz:  Nowadays, the only tools to invest in a socially responsible manner are the Respect Index of the Warsaw Stock Exchange and SKOK SFIO Etyczny (Ethical) 1 and 2 funds. Unfortunately, after a modification of selection criteria, the new Respect Index distinguishes the companies which have the highest level of corporate governance, which results in the imbalance between particular ESG factors in the company’s functional evaluation.

Paradoxically, the social dimension of the crisis makes favorable conditions for promoting SRI, as a remedy to profit-driven capitalism, due to the fact that financial institutions’ reputations were damaged by the crisis. The shift in investors’ expectations should become a driver of change in shareholder activism and play an important role in promoting wider transparency and responsibility of business.  It applies particularly to institutional investors, who personally noticed the severe consequences of their passive attitude during the crisis.

The post-crisis period is also a suitable moment to present SRI as a modern theory of portfolio selection, something far beyond a fringe activity limited to people who have a critical approach to capitalism per se. On the contrary, to make SRI not only an idealistic conception, evoked only in the times of crisis, requires making investors aware of its economic dimension. This can be done, for instance, by delivering quantitative evidence of how integration of ESG factors influences companies’ profitability and the amount of cash flows to stakeholders.

An opportunity to elaborate these issues exists in spreading the practice of social reporting, in which the Polish version of the “Let’s Report” template (available since 2010) will play a vital role.  In a post-crisis reality it is extremely important for SRI to be not limited only to an ordinary denouncement of non-ethical actions, because it is strongly possible that investors’ memory is good, but very short in fact.