Five Questions about SRI – Weekly Expert Interview with Olaf Weber, Associate Professor, Export Development Chair in Environmental Finance, University of Waterloo, Canada – April 20, 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 Olaf Weber, Associate Professor, Export Development Chair in Environmental Finance, University of Waterloo, Canada.

The University of Waterloo’s Environment and Business program combines traditional business courses with cutting edge environmental courses.  Olaf Weber is Associate Professor and holds the Export Development Chair in Environmental Finance.  His research and teaching interests are in the area of environmental and sustainable finance with a focus on sustainable credit risk management, socially responsible investment, social banking and the link between sustainability and financial performance of enterprises.  He is a member of the Canadian Business Ethics Research Network (CBERN).  He holds a M.A. in Psychology from the University of Mannheim, Germany and a Ph.D. (Dr. rer. nat.) from the Technical Faculty, University of Bielefeld, Germany.

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

Professor Olaf WeberSocially responsible investment takes social and environmental issues into account in addition to the financial analysis. Thus it adds components that could influence the financial return of an investment but are not part of the conventional investment criteria.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Professor Olaf WeberIn the first instance, there are additional criteria used, as I explained in my response to the first question. Usually SRI includes and excludes investment objects or securities based on the use of these criteria. Thus, for instance, the firms invested in should perform well with regard to environmental, social or governance criteria and/or should not be excluded because of negative criteria. However, SRI investing is a very broad field:  it may mean the exclusion of certain investments, it could be a different weighting of investments based on their social and environmental performance or it could be the exclusion of sectors because of environmental or social issues.

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

Professor Olaf WeberGovernance is a complicated issue because in different markets we find different regulations and concepts. What could be standard in one market could be problematic in another market. The same is valid for social issues. In some countries employment issues, or for instance pensions, are highly regulated whereas in other countries they are not. Environmental issues are a bit easier to manage because there are certain standards. Generally I believe that communicating the ESG performance in a way that it is understandable for everyone is the most challenging issue.

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

Professor Olaf WeberI think gathering valid and reliable information is the most challenging issue. Many rating methods that rely on more or less standardized reporting are not usable in emerging markets. Also, there are language and cultural barriers that have to be managed as well. Because standard methods of ESG analysis cannot simply be used, the analyses are costly and less reliable than ratings in mature markets.

Emerging Markets ESG:  You are the co-author of book article entitled, “The Financial Performance of SRI Funds in Times of Turmoil.”  Does the article analyze the impact of emerging markets on the financial performance of SRI funds?  What role do emerging markets play in the current times of turmoil?

Professor Olaf WeberThe article does not especially analyze emerging market funds but these types of funds are included in the sample as well. As the title states, emerging markets play an important role because they are emerging. Because of that they are more dynamic and thus interesting for investors. Furthermore they were a bit less affected by the financial crisis than mature markets. Thus probably many investors channel their capital in these markets. From an SRI perspective this is important because the market can be much more sustainable form the beginning if investors integrate environmental and social issues into their investment analyses.