Five Questions about SRI – Weekly Expert Interview with Daiga Auzina-Melalksne, Chair, Management Board, NASDAQ OMX Riga Stock Exchange, Riga, Latvia – October 21, 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 Daiga Auzina-Melalksne, Chair, Management Board, NASDAQ OMX Riga Stock Exchange, Riga, Latvia.

NASDAQ OMX Riga is a self-regulated organization, issuing and enforcing its own rules and regulations consistent with standard exchange
operating procedures. Daiga Auzina-Melalksne joined NASDAQ OMX Riga (former name – Riga Stock Exchange) in 1998, in the position of Issuer Relations officer, later she was heading the Market Services department and served as a board member at NASDAQ OMX Riga and Latvian Central Depository. In April 2005 Mrs. Auzina-Melalksne was elected the Chairman of the Management Board of NASDAQ OMX Riga.  She has an Executive MBA degree from Riga Business School as well as a bachelor’s degree in Economics and a masters’ degree in business management from the University of Latvia.  In 2010 Mrs. Auzina–Melalksne was elected to the Board of the American Chamber of Commerce in Latvia. She is also a Member of the Executive Committee of the Baltic Institute of Corporate Governance.

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

Daiga Auzina-Melalksne: I agree with a definition that says these are companies which integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. A recent worldwide trend is that investors are seeking ways to invest in such companies.  Eventually this trend may come to our region as well. However attracting investments is not the only incentive for company managers in Latvia why to operate their companies in socially and environmentally friendly manner; there is quite a good understanding among them that companies which take resources from the society should return some part back to it and that CSR is an important part of stakeholders’ relations.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Daiga Auzina-Melalksne: Fund managers and investment companies develop investment policies that allow investments only in socially responsible companies in such way placing more value on long term performance of the companies and overall society. SRI policies can also be followed and implemented, for example, because society expects and demands that pension funds follow socially responsible investments. Socially responsible companies receive more favorable investment recommendations in recent years indicating that analysts place greater
value on such companies.

When developing SRI strategies fund managers and investment companies face a challenge. SRI unlike financial performance is harder to be quantified and is subjective. There are numerous factors in the company’s behavior that can influence its financial performance and its share price and CSR is one of them.

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

Daiga Auzina-Melalksne: Experts believe, and I agree with them, that in many ways the business environment in the Baltic countries – even
though each has its differences – is much more Western in many ways than maybe Russia or other CIS countries. The cultural codes of ethics and standards have to some degree been passed down the generations – after all, even in Soviet times the Baltic States were regarded as “Europe”. Today when I talk to investors and our stakeholders they more frequently discuss the governance issues and less frequently, environmental and social aspects of listed companies.

There are companies which are still struggling with the governance issues, but at the same time there are many companies which have outgrown others and are not only well governed but also are investing into their production facilities, making the production more efficient and decreasing the environmental impact. Among NASDAQ OMX Riga listed companies there are companies which are paying more and more attention to the
corporate social responsibility issues, six companies out of 32 have a good corporate social responsibility sections in their annual reports or have
prepared a separate report.

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

Daiga Auzina-Melalksne: I believe we have made a very good progress in analyzing corporate governance among Baltic companies. This is also easier to analyze as criteria are applicable to a wide range of companies regardless of their industry. Extra-financial themes are more challenging to be measured and more depend on company – how open and transparent it is and whether it communicates its achievements proactively.

Environmental and social responsibility is not measured for Baltic companies and the relationship between corporate social responsibility and financial performance is unknown. Therefore it is rather challenging for investors to invest in Latvia based on social and environmental criteria unless they don’t carry out their own analysis.

Emerging Markets ESG:  From 2000 through 2007 Latvia experienced significant gross domestic product (GDP) growth rates year after year.  Then the economy suffered a major contraction.  Now the situation has stabilized.  Has the experience of all
phases of the business cycle within the past decade impacted Latvian capital markets?  Is SRI discussed in Latvia?

Daiga Auzina-MelalksneGood corporate governance and corporate social responsibility becomes more and more important among Latvian companies. Politicians and society in general as involved parties start to realize that there is a link between a good governance and economic performance of the company. As an exchange we‘ve been very active in promoting governance agenda and organized a number of
discussions and roundtables with politicians, experts and different NGOs. We are also very active as a member of Baltic Institute of Corporate Governance (BICG). BICG was founded in the beginning of 2010 and it plays a significant role in creating a better understanding of good governance between public and private companies within the region.

In 2010 BICG together with NASDAQ OMX Riga, international audit companies and investment banks in order to draw attention to the poor governance of state-owned enterprises in Latvia prepared an annual review of Latvian State-Owned Enterprises. This annual review encouraged future discussions on the governance problem of government owned companies in Latvia and draw politicians and wider society attention to this problem. I believe that in the future in Latvia there will be even more discussions taking place on good governance, corporate social responsibility and socially responsible investment.