Five Questions about SRI – Weekly Expert Interview with Izabela Błażowska, Managing Editor, (Responsible Investing), Krakow, Poland – November 4, 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 Izabela Błażowska, Managing Editor, (Responsible Investing), Krakow, Poland.

Established in October 2008, is the first internet portal in Poland devoted to responsible investing. (“Odpowiedzialne inwestowanie” means responsible investing in Polish).  Its aim is to promote SRI among the Polish financial community. It also promotes awareness about and best practice in environmental, social and governance (ESG) reporting among Polish companies, listed, private and state-owned, and the Polish investment community.  It publishes articles and news, announces events and disseminates information online as well as at conferences, lectures and workshops which it organizes or in which it participates.  Izabela Błażowska completed her master studies at the University of Economics in Krakow which included a year and a half student exchange in Vienna.  She gained experience in different business areas in companies such as CapGemini, Mars, Shell, Siemens and Thomson-Reuters.  Since 2010, she is a member the Polish Institute for Responsible Business (IOB). In 2011 she completed a postgraduate program in “Sustainability Leadership” at the University of Cambridge.  She also participated in the Responsible Investment Working Group, an initiative of the Polish Ministry of Economy. She contributed to the final recommendations to the Polish Government regarding initiatives which are to be taken to boost interest in SRI among the financial community.  The majority of these SRI projects were conducted pro public bono.  Together with her husband Krzysztof Błażowski, she has run several companies and projects in e-business, e-commerce and search engine marketing.  SRI is her hobby and its principles are reflected in all of her undertakings.

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

Izabela Błażowska:  For the last few years, a lot of institutions all around the world have been struggling to define this concept. On the one hand, I agree that in our complex corporate and investment world it is not easy to provide one sustainability framework which will fit all. On the other hand, there have been so many definitions developed to date that one can get really confused about exactly what SRI embraces. This could lead to a threat that financial institutions would pick the definition which demands the least and still get a responsible investor label. Society, which is hit by so many communications on a daily basis, picks up only PR sound-bites -“Responsible” or “Not Responsible” and does not bother to dig deeper. And that is a shame, because a more conscious, demanding and organized society would be the best indicator of any (ir)responsibilities.  In my opinion, unless institutions themselves begin to strive for an evaluation of their activities by their stakeholders, no definition would help to become truly responsible.

One question which ought to be asked is: To whom or to what should investors be responsible – their stakeholders or a definition? Higher and higher floors are being built to see the widest possible perspective; however, we tend to forget about the foundation.

So what does socially responsible investment mean to me?  First and foremost, it means full transparency in the process of checking, amending, controlling and communicating strategy, policies, processes and other organizational practices to all stakeholders using appropriate and understandable language for each of these groups. Secondly, it means evaluations of stakeholders’ awareness of these actions and ultimately their satisfaction with undertaken initiatives. This might concern environmental, social, corporate governance or any other topics and areas which are important to stakeholders. This of course concerns both the corporate and investment sectors. A responsible investor cannot be only those who embrace ESG issues in decision-making and ownership practices – in today’s world it is far from demanding. I think that the second round – stakeholder evaluation, using opportunities coming from social media, is still yet to come. But anyway, we are not on a wrong path.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Izabela Błażowska:  First of all, I am not in favor of distinguishing between R,  SR, sustainable, TBL investors.  This causes a lot of confusion.  When using “SRI” I mean the whole group of such investors which consider ESG factors as a core part of their investment process.  Such investors use ESG information to evaluate their assets and to engage with portfolio companies.  SRI investors consider ESG as a good way to manage long-term risk, as well as to capture opportunities. They willingly comment on what they are doing in terms of ESG or which SRI principles they promise to follow; thus they are definitely more transparent and active than mainstream investors with regards to their overall investment practices.

With regards to mainstream investors, although in the beginning they included ESG criteria only when they detected an obvious and serious impact on the valuation of their portfolio, now more and more often they consider ESG as a part of overall good investment practice. The vast majority of institutional investors understands that acquiring shares of a company and including them in a portfolio equals co-ownership and shared responsibility for any actions and impacts of this company on its stakeholders and environment. Having said that, mainstream investors are usually not fully aware of this responsibility, whereas SRI investors, depending on their level of initiation, take more or less advanced extra-financial analysis before making an ultimate investment decision.

The global economic downturn which started in 2008 revealed may problems among financial institutions and rating agencies as well as the weakness of corporate governance and failure of regulators. Myopic incentive policies for investment professionals all around the world resulted in irresponsible decisions which can be perfectly summarized by the quote from James Cameron movie Avatar:  “Killing the indigenous looks bad, but there’s one thing shareholders hate more than bad press – and that’s a bad quarterly statement.”  Therefore it is expected that financial institutions reconsider their approach towards risk management, as the mechanisms which were supposed to work fine eventually failed. This concerns both SRI as well as mainstream investors. I believe that consideration of ESG factors conducted on a systematic basis by all investors should lead to a shift towards seeking real value, as well as a long-term understanding of opportunities and risks. One day SRI will be the only option; it will go mainstream, because there is no other alternative. However, evaluation of the materiality of ESG issues and incorporation of those factors into mainstream valuation models requires a well-educated workforce which the market lacks today.

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

Izabela BłażowskaIn June 2010 at the Warsaw Stock Exchange, GES Investment Services presented an interesting survey in which it compared the state of reporting about ESG factors by companies included in Polish indices (WIG20, mWIG40 and Respect Index) with companies included in indices from other New Europe countries.  (The Respect Index, launched by the Warsaw Stock Exchange in 2009, led to the establishment of the first index of responsible companies in Central and Eastern Europe [CEE]). In the survey, the Respect index was included in the Top Three “New Europe” indices in terms of environmental performance. Also together with WIG20, the Respect index was included in the Top Three “New Europe” index performers in terms of social and corporate governance performance. Of all ESG factors, in Poland corporate governance is the most developed.  Transparency in a great majority of CG areas is required by law.  The second position was environment and the third was social issues. The survey indicates that regarding the environment, Polish companies do not provide enough information on how they handle the most important impacts and risks. Even less information can be found regarding social issues.

On the other hand, the latest survey (2011) conducted among Polish listed companies, which aspired to be included in the Respect Index, revealed that companies put greater emphasis on creating friendly workplaces. It also detected some emerging trends that encouraged companies to undertake numerous initiatives in favor of environmental protection. However, there remain some challenges ahead. Some companies have not yet developed any comprehensive risk management system that takes into account social and environmental issues. Although more and more companies have developed CSR strategies, in most cases these documents are of a general, non-binding nature. Social reports are becoming standard on the Polish market, however only a few of these reports are compiled based on recognized international standards.

Finally, there is a third source worth mentioning here. In April 2011, Poland’s Responsible Business Forum (FOB) released “Responsible Business in Poland 2010: Good Practices Report.” This 9th annual report contains over 100 good practices by 108 Polish large as well as small and medium-size companies. Among these practices we can find many good examples of social engagement.  However, it also emerged that few managers can measure the effectiveness of such social actions; this presents the next challenge that needs to be addressed.

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

Izabela Błażowska:  Poland is a relatively young market when it comes to SRI. It has been only four years since various institutions began to explore this concept. So instead of asking about respective ESG criteria, we talk about the awareness of extra-financial analysis and the importance of taking it into decision making processes in general.  It is worth mentioning that in Poland within the last 12 months two independent surveys were conducted among representatives of the Polish investment sector which aimed to identify emerging SRI practices as well as preparedness for further progress. The first survey was conducted between August and October 2010 by the Responsible Business Forum, portal and the research company Pretendent; it obtained only an 11% response rate. The second survey was conducted in June 2011 by Deloitte and gained a 33% response rate.

The key outcomes from both surveys revealed that over 30% of respondents do not know about the SRI concept at all; over 50% of respondents do not take ESG factors into account in the decision-making process and do not see the direct impact of CSR activities in reducing business risks for companies operating on the Polish market.

As the top three barriers for SRI development in Poland the respondents indicated:  1.   Lack of conviction about the essence of ESG factors in their investments; 2. CSR reports of Polish companies are not an adequate source for in-depth extra financial analysis (Note:  In 2010, only eight Polish companies reported according to the GRI framework.);   and 3. Lack of professional and specialized SRI consulting companies.
Moreover, in Poland we lack relevant professional literature and workshops for financial professionals informing them why they should analyze extra-financial criteria and how to do it. Furthermore, CSR/SRI reporting is not mandatory, neither for companies nor investors.

Emerging Markets ESG: is now four years old.  Have any discernible trends in SRI developed in Poland during this time?  What are the key drivers of SRI in Poland?

Izabela Błażowska:  Indeed, the portal is as young as the SRI concept in Poland itself. Over the past four years we can observe a growing number of initiatives taken by various institutions to boost greater transparency and responsibility among the participants of the Polish financial community.  In my opinion, Poland is definitely on the right track to ensure dynamic growth of SRI.  As noted above, in 2009 the Warsaw Stock Exchange launched the RESPECT Index, the first SRI index in CEE companies.  The majority of participants in the above-mentioned Deloitte study (2011) are aware of this index. There are also several competitions and rankings designed to award the most responsible companies in general as well as in specific categories:  for example the annual  “Good Company Ranking” by Responsible Business Forum, Kozminski University and PwC; and “The Best Workplaces” by the Great Place To Work® Institute Polska. With regards to education, more and more academic research is being conducted with respect to SRI, at institutions including the Cracow University of Economics, the University of Gdańsk and the Warsaw School of Economics,  SRI is included in CSR postgraduate studies (at Kozminski University, Tischner University and the University of Warsaw) and we can observe more events and press articles dedicated to SRI. The companies which are currently engaged in SRI research and advice in Poland are Abadon, Deloitte, GES Investment Services and PwC.  I personally appreciate that your portal reports on what is happening in our country with respect to SRI development. With regards to initiatives of, during these years I can highlight the following:  participation in Eurosif “European SRI study 2010” (in which Poland was included for the first time); the survey about “The Importance of CSR among Polish Institutional investors” in collaboration with Responsible Business Forum (FOB) and research company Pretendent; and articles, book chapters, presentations at conferences and publications. An English-language overview can be found here.

There are a number of ethical and green funds which are available for Polish retail investors. The list of these funds has been collated by the portal and is regularly updated. The actual list of SRI funds in Poland can be found here; please note that this information is in Polish.

And what are the key drivers of SRI in Poland? Returning to the studies mentioned above, half of the respondents believe that within the next two to three years there will be an increased interest in SRI. The top three drivers which would contribute to increased interest in the ESG activities of investee companies are: 1. obligatory regular ESG reporting by companies; 2. positive returns of sustainability indices; and 3. communication on ESG outcomes via investor relations departments.

With regards to the first driver, the latest big step towards raising awareness about SRI in Poland is a series of recommendations to the government and the country’s social partners delivered by the Responsible Investment Working Group. The group was initiated nearly two years ago by the Polish Ministry of Economy and its work resulted in a set of “soft law” guidelines focused mainly on education, financial / fiscal incentives, promotion and research. Government support in these areas could significantly contribute to interest in SRI, growth of SRI and appropriate implementation of its principles among the Polish investment community.

Finally, a great opportunity for faster growth of SRI practices might also be the promotion of SRI activities by foreign investment institutions operating in our country (such as Aviva, AXA, KBC, UBS), which are signatories of the UN Principles for Responsible Investment and already implement these principles in other countries. Multinational corporations operating in Poland such as Coca-Cola, Danone or GlaxoSmithKline already provide positive examples of sustainability practices. Now we look forward to seeing good practices of SRI of the multinational investors who operate in our country.