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 Dr. Tim Cadman, Sustainable Business Fellow, School of Accounting, Economics and Finance, Faculty of Business and Law, University of Southern Queensland, Australia.
Dr. Tim Cadman is the Sustainable Business Fellow in the University of Southern Queensland Faculty of Business and Law, and the Australian Centre for Sustainable Business and Development where he is part of the Sustainable Governance, Finance and Accounting research stream. He specializes in governance and its relationship to sustainable development, most notably, climate change, natural resource management and responsible investment. His latest publications, including those relating to investment, can be seen on his profile on the University of Southern Queensland website. His latest book is Quality and Legitimacy of Global Governance: Case Lessons from Forestry
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Tim Cadman: I think markets, and analysts in particular, get overly concerned about detailed definitions. This is a field of investment that has been around for decades now. I refer to this kind of financial activity as consisting of investment practices that place an emphasis on social, and environmental – as well as economic – values, resulting in the designation of such investment as either ‘ethical’, or ‘socially responsible’, or simply ‘responsible’. I personally prefer the term responsible investment (RI), as it implies all forms of responsible investment.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Tim Cadman: Clearly, these kinds of investment are not based on the ‘single bottom line’ philosophy of profit maximization at the expense of other social, environmental or even economic values (irresponsible investment to my mind includes practices which also impact negatively on the economy – large, or small scale – as the global financial crisis demonstrates). Responsible investment accepts that capital needs to be generated from activities that are beneficial, not detrimental, to the environment, society, and the economy. For example, investing in a company, which simply clears a forest for a one-off crop, is not responsible. A company, which harvests a forest whilst also protecting environmental values, sustaining local economic activity, and is part of the social fabric, is ‘responsible’.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
Tim Cadman: I think there is a real problem in breaking down these concepts into three. What responsible investment needs is a broader institutional context where financial institutions, companies, investors, and financial as well as non-financial stakeholders, operate under principles of ‘good’ environmental-social governance. By environmental-social governance I mean not just the expected general corporate governance principles of accountability and transparency, etc., but also the embedding environmental and social values in institutional structures and processes as a whole. For example, there’s little point in investing in rainforest conservation, if you evict indigenous people from the forest you are trying to manage for a sustainable economic return. This example is a present danger for emerging market companies, in my opinion.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
Tim Cadman: Investors are very often driven by the advice of financial planners, who are often caught up in ‘single bottom line’ markets, which they are trying to pass of as being ‘green’ but in fact pay only minimal lip service to sustainability principles. Above everything, investors need to be aware of this ‘greenwash’. This is a potential danger in emerging carbon markets for example. This is why I argue that unless social and environmental factors are taken into consideration when looking at the governance of a given investment product, investors can be actively contributing to negative outcomes (so-called perverse incentives).
Emerging Markets ESG: You have written about the legitimacy of ESG analysis as an analytical framework for responsible investment. What role do emerging markets play in the debate about ESG standards as a framework for SRI?
Tim Cadman: Emerging markets are at the forefront of the debate around ESG standards. It is my view that issues of interest representation, organizational behaviour, decision-making and implementation are central to ‘responsible’ investment. Multi-stakeholder participation in investment-related deliberations is essential to achieve positive lasting outcomes, for shareholders and local communities alike. Billions of dollars are pouring into developing countries through such initiatives as the Clean Development Mechanism, and other examples of ‘carbon’ finance at the moment. Without ESG standards, emerging markets could well fall prey to a ‘carbon financial crisis’ with knock-on effects across the whole investment sector.