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 collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets;
- To reflect on what SRI in emerging markets means to practitioners; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview, the inaugural interview in the second year of the series, is with Adam de Sola Pool, CEO, Environmental Investment Partners III (EIP), Poland.
Adam de Sola Pool is CEO of Environmental Investment Partners III (EIP), a venture capital firm. Founded in 1997 in the United States and Poland, the EIP funds (I, II, and III) have sought to focus their investment on environmental and renewable energy companies in Central Europe with a special emphasis placed on Poland. EIP prefers to invest between €0.1 – 3 million per company, and hold that investment from two to seven years. In the course of EIP’s history since 1997 it has founded or developed over 20 companies of which three have been in wind, three in solar, three in water or waste water, two in biogas, two in solid waste, one in district heating, one in environmental construction and one ESCO. Before becoming CEO of EIP, Adam worked for Salomon Brothers in mergers & acquisitions, the Industrial Bank of Japan, the European Bank for Reconstruction and Development, and the National Investment Fund Fortuna (Poland). Adam holds a MBA degree from MIT (1988) and a B.A. from the University of Chicago (1981). Currently EIP is seeking to partner with a substantially larger regional or global fund so that it can continue its investments beyond the early stage rounds and so that it can provide its investees with the global reach that can be provided by a fund with offices and market knowledge beyond Central Europe.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Adam de Sola Pool: We are not strict definitionalists. To us, SRI has many definitions, each of which can be useful for the respective definer or in specific situations. Overall we seek companies where the management focuses on People, Planet and Profits as sustainability drivers and which understands that their license to operate comes from all of those factors. Managements that define success or sustainability only based on profits will not get an investment from our firm.
We do not require management to meet any specific thresholds as regards People, Planet or Profits but we do require that they endeavor to always improve their performance in those three factors. Thus, it is more a commitment to the philosophy and to process improvement than a strict set of tests to be met prior to or during an investment from EIP. We see that a commitment to continuous improvement in all factors leads to better financial returns and lower risks of failure.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Adam de Sola Pool: SRI is mainstream investment for EIP and I believe that it is wrong to think of SRI as a peripheral sort of investment. I do believe that most investment houses take into account all three factors either formally or informally in their investment making process. It is widely known by my VC colleagues than any firm that disregards any factor for any substantial length of time will be increasing its riskiness and thus endangering its license to operate. I do not think I know a single venture capitalist that does not consider it a risk to its investment if a company management wantonly disregards good social, environmental or financial practices. So for me, SRI is mainstream investment and the peripheral investment is the pure financial / technical trading that occurs either as day trading or as machine generated arbitrage. As a venture capitalist, sustainability comes from all three factors not any single one.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Central Europe to manage?
Adam de Sola Pool: The answer to this question is case / company specific but usually governance has more challenges than environmental or social for Central European companies as governance has fewer strictly defined standards. For many companies in the environmental sector there are published definitions of what constitutes “Best Practices”. For the social sector there are relatively advanced local and European Union laws which simply cannot be broken. But for governance it is often a matter of judgment as to what structures & practices should be supported and which not.
However as more and more companies learn what is good (or bad) corporate governance a set of de facto standards is beginning to emerge in Central Europe. For example, the annual surveys by the Partners for Financial Stability (PFS) Program were extremely useful in highlighting what was good corporate governance practice. Those lessons are now well entrentched in the minds of investors,
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Central European companies to analyze?
Adam de Sola Pool: Certainly governance is the most difficult factor. Even in Western European firms there is a tension between what information should be provided to (or solicited from) your minority financial investors. That same tension is present in all the firms we invest in, as management needs to operate in the best interests of all the investors and all investors do not necessarily have the same goals.
These conflicting goals are often felt when company founders (often technology visionaries) own a majority of the company or when trade unions are also investors or when there is a mix of early and late investors. This is true in Central Europe as well as the rest of the world.
Furthermore almost all of the companies I invest in (water, waste water, energy, heat, solid waste management etc.) work closely with governments (local, regional or national) and thus routinely are exposed to corruption pressures. Central Europe has many countries where corruption is prevalent and my companies face a challenge to convert the requests for monetary payment into a socially and legally acceptable form of societal support such as installing lighting on school playing fields, building a local clinic or sponsoring a harvest festival. They face a challenge in converting a purely personal request for monetary gain into a commitment to the society at large that supports the company’s commitment to People, Planet and Profits – its Triple Bottom Line objective.
Emerging Markets ESG: Which drivers are pushing SRI in Central Europe? Has the financial crisis influenced attitudes toward and perceptions about SRI?
Adam de Sola Pool: More and more people feel that a formal assessment of a company’s commitment to People, Planet and Profits is required in order to screen out un-necessary risk taking. The Occupy Wall Street movement shows that financial institutions license to operate is at risk if they do not take into account all three factors. The BP oil spill shows that risk taking in operating procedures does cost shareholders billions of Euros. We do not yet have such famous examples in Central Europe but corporate management is aware of these trends and investors do ask managements these questions. So the SRI drivers are West European and American trends.
The financial crisis has heightened risk assessment in all firms – especially banks – and thus risks associated with negligent SRI or PPP practices are coming under ever increasing scrutiny. This is good for all of us.