Five Questions about SRI – Weekly Expert Interview with Amr Addas, Adjunct Professor of Finance, John Molson School of Business, Concordia University, Montreal, Canada – February 17, 2012

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 is with Amr Addas, Adjunct Professor of Finance, John Molson School of Business, Concordia University, Montreal, Canada.

Following a generous donation from the Molson Family and the Molson Foundation, in November 2000 Concordia’s Faculty of Commerce became the John Molson School of Business, Concordia University.  Together with the David O’Brien Centre for Sustainable Enterprise (DOCSE), also at Concordia University, it offers the Sustainable Investment Professional Certificate (SIPC).  The SIPC is the first professional designation of its kind, offered through a University Business School, specifically geared towards investment professionals.  The SIPC was created in response to the growing interest in sustainable investment approaches. Designed to provide professionals in the finance, investment and corporate world with a unique set of skills, knowledge and analytical thinking; the SIPC prepares holders to take full advantage of new professional opportunities created by the potential of sustainable investing.  Amr Addas is an Adjunct Professor of Finance at the John Molson School of Business, Concordia University.  Amr is also the manager of the Formula Growth Trading Room at the JMSB and a Research Associate with the DOCSE.  Amr is a member of the core faculty for the SIPC program and an Advisory Board Member for the Coalition of Universities for Responsible Investing (CURI).   He is also a lecturer at McGill University’s School of Continuing Studies.  Amr received the Merit Teaching Award for Outstanding Teaching from McGill University in 2009.  He obtained his MBA from the University of Michigan at Ann Arbor in 1995 and his B.Sc. in Mechanical Engineering from the American University in Cairo in 1991.  In March 2010, Amr became a regular active member of the CFA Institute and he is a Level III Candidate in June 2012.

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

Amr AddasSocially responsible investment (SRI) is the integration of environmental, social and governance (ESG) considerations into the management and selection of investments.  Perhaps an updated definition would be that SRI is an investment approach that integrates long-term Environmental, Social and Governance (ESG) criteria into investment and ownership decision-making with the objective of generating superior risk-adjusted financial returns.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Amr AddasSRI can be described as undergoing a so-called second phase, SRI 2.0 if you will.  Historically, SRI was mainly concerned with negative screening, whereby investors with certain social values would invest according to those values by eliminating firms that don’t meet their social screens, thus effectively reducing their investment opportunity set and their potential returns.  Today, SRI has evolved into a more sophisticated screening process that encompasses both positive and negative screens.  The positive screens result in the selection of companies that achieve superior performance along two dimensions, financial and sustainable.

Thus the main difference between SRI and mainstream investment is that added layer of screening that SRI utilizes.  But the gap is narrowing as evidence mounts that SRI investment strategies often result in benchmark outperformance.

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

Amr AddasThe most challenging theme for emerging markets in my opinion is the governance theme.  Corporate governance in emerging markets, including the most advanced ones such as Brazil, China and India lags significantly behind developed economies.  Ownership of public companies is rarely as dispersed as it commonly is in developed markets.  The share float is often a fraction of total shares outstanding.  Furthermore, many of the most successful companies in some emerging markets are family owned and controlled.  Minority shareholders have little say in the governance or management of such firms.  This applies to Brazil and India, but not China.  In China, the problem is more related to state control of most large publicly traded companies, where politics and toeing the party line often take precedence over good governance practices.  China’s philosophy seems to be more oriented towards so-called state capitalism.  Minority shareholders essentially have no say over how such firms are managed.

Corruption is also endemic in many emerging markets.  That amplifies already existing principal-agent conflicts and often results in management awarding themselves excessive perks and/or making investment decisions that do not always have the maximization of shareholder wealth as an objective.

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

Amr Addas:   The social theme is in my opinion the most difficult for investors in emerging market companies to analyze.  Labor codes are often severely lagging in those markets.  Weaknesses are often prevalent in one or more areas such as the right to strike or even organize, work conditions, safety, minimum wages, minimum age, overtime pay, or maximum hours per week.  Furthermore, community involvement is often neglected by large corporations in emerging markets.  The problem with analyzing those issues arises because of the lack of disclosure by emerging market corporations on their labor practices and policies.  Legislation needs to be introduced in most emerging markets to bring labor codes up to par with developed market labor codes.  Similarly, disclosure rules need to be not only improved, but more importantly enforced.  Lack of enforcement of laws already on the books is often a problem in emerging markets.

Emerging Markets ESG:  Would you please introduce the Sustainable Investment Professional Certificate (SIPC).  What role do emerging markets play in the SIPC curriculum?

Amr Addas:  SIPC was created in response to the growing interest in Sustainable Investment approaches.  It is designed to meet the needs of a new breed of investors who want their investments to generate positive financial returns while creating positive environmental and social impact.  This rapidly developing area requires a new set of investment and risk management skills.  SIPC thus contains six modules that address this demand.  They are Sustainability Overview, Governance, Ethics, Social Sustainability, Environmental Sustainability, and Sustainable Investing.

The focus is on practical self-learning from a well-designed curriculum.  Our testing approach is not to test overall knowledge through traditional examination but rather to evaluate the participant’s ability to apply the knowledge learned from the modules. The program aims at developing research skills, critical thinking, creativity, and decision-making skills.  Modules consist of learning materials and readings. The learning materials create a coherent discourse and guide the learning process. The readings reflect relevant theory, research, and examples of the topics. At the end of each module a project is assigned where the student is expected to engage in scenario driven reports or case studies and draw on the material learned in the module to come up with solutions and decisions.

Readings on emerging markets feature mostly in Modules 4, 5 and 6.  In Module 4, examples of social development schemes in African countries are discussed.  In Module 5, sustainable forest development programs are examined, specifically the REDD initiative which has had some success in Indonesia.  Finally, in Module 6, a study by Mercer and the IFC examines the integration of ESG factors into investment processes in emerging markets.  Another study by Trucost analyzes carbon risks and opportunities in emerging markets by focusing on the exposure of different regional equity strategies to carbon costs.