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 Anne-Catherine Husson-Traore, CEO, Novethic, France.
As part of Caisse des Dépôts, Novethic is the leading research center in France on Socially Responsible Investment (SRI). In 2009 Novethic launched France’s first SRI label, which is awarded to mutual funds that fully integrate Environmental, Social and Governance (ESG) factors and provide exhaustive information on their extra-financial characteristics and portfolio holdings. Upon the release of its studies, Novethic organises every year Novethic’s Annual Event which brings together hundreds of European asset owners (pension funds, welfare organisations, perannuation funds, insurance companies, associations and foundations) to exchange information about best practices and proven strategies to successfully integrate ESG factors in investment practices. The 2011 Annual Event takes place on November 28, 2011 in Paris and is devoted entirely to the challenges of ESG risk management: How exactly are these ESG risks to be identified and integrated? How can they be factored into conventional risk calculations?
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Anne-Catherine Husson-Traore: My definition of SRI is to integrate Environmental, Social and Governance (ESG) issues into asset management. To do SRI you need an analysis of these topics for listed companies, unlisted companies and states as well as rules which impose an exclusion of investment in companies or other assets with a too weak ESG rating, despite a good financial rating.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Anne-Catherine Husson-Traore: As you know, no country has a legal definition of SRI. There are different practices among professionals and different countries where SRI is developed. But every professional who adopts SRI does so for long-term investment. Mainstream investment is focused on short-term
financial performance. SRI recognizes that short-term financial performance could have a high price over a long-term perspective. To create and maintain value in many countries and sectors, you need to exclude environmental damages and social trouble, while promoting good health and security conditions. SRI tries
to identify companies which have this kind of situation. Disasters in which BP and TEPCO were involved
have shown to investors that events with huge environmental and social consequences could also have bad financial consequences. When the professionals lost so much money because of the financial crisis, one could hope that they try to change their mind and their investment models. But I’m not sure. I thought so in 2008 but three years later, you find the same people at the same place in the financial sector who hope to return to business as usual.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
Anne-Catherine Husson-Traore: It depends on sectors and countries. It’s difficult to generalize. The first challenge is transparency. There are many places where companies say very few words about the ESG impacts of their activities. Maybe governance is the first issue because if a company could explain to its stakeholders and shareholders its organization, its environmental management and its social policy for trade union, human rights, bribery and so on, it’s possible to have an extra-financial rating. For environmental issues, it’s easy to find indicators like carbon emissions or water consumption because companies and investors understand that these issues have a price. For social, there are indicators too, but from the SRI perspective human resources is more a part of the value of a company than a cost. So, it could be better to pay employees well
than to cut their wages to achieve a cheaper price for the company’s product… SRI means “globalizing” and trying to estimate the price of a product through incorporating its externalities. From this perspective, there is no difference between companies from developed and emerging countries.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
Anne-Catherine Husson-Traore: As for companies, it’s difficult to generalize and transparency is also the first step for investors. Very often, investors don’t know the companies in which they invest, especially in emerging markets. Extra-financial analysis is a good start to better understand the risks and opportunities associated with companies in which they want to invest. Very few responsible investors in Europe have
assets in emerging markets; this is especially true in France. They are afraid of the risks. This might appear strange at a time where European countries seem to be so fragile, but in fact this is the case. If SRI investors want to try emerging markets with an ESG perspective, it could be difficult to find good analysis. ESG rating in emerging countries has just begun. You could find pioneers like Solaron in India or Sustainable in Africa, but they need to find new customers in Europe for their business development. It’s the usual circle. Which comes first: supply or demand?
Emerging Markets ESG: Novethic was established in 2001. From its dual perspective as a media outlet and a research institute, has Novethic identified any trends in SRI in emerging markets over the past decade? What are the key issues in SRI in emerging markets today?
Anne-Catherine Husson-Traore: We work more on emerging markets from a media perspective. Many articles cover the conditions of growth in these countries. Palm oil issues, energy trends, environmental impacts of mining sectors, social troubles in China – our articles, written in French by journalists, cover all these subjects. Because they have settled their production in emerging markets, CSR is an issue for large multinational corporations. As a research center specialized in SRI, we saw over the past decade the emergence of SRI in emerging markets. The trend includes very interesting developments such as sustainable indices in Brazil, Mexico, Kuala Lumpur and even in China, as well as the obligation for listed companies on the South African market to have disclosure on ESG issues. SRI could make a difference for investing in emerging markets and we hope to soon publish some surveys on the huge growth of SRI in emerging countries. As you see I still have hopes and wishes…