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 Julie Fox Gorte, Ph.D., Senior Vice President for Sustainable Investing, PaxWorld Management LLC, Portsmouth, New Hampshire, United States of America.
Pax World Management LLC, investment adviser to Pax World Funds, is a US SEC-registered investment adviser offering a comprehensive platform of Sustainable Investing solutions: Pax World Funds – a family of actively-managed mutual funds; ESG Managers® Portfolios – a series of multi-manager asset allocation funds with asset allocation, manager selection and portfolio construction by Morningstar Associates; ESG Shares® – the first family of exchange traded funds (ETFs) devoted exclusively to a Sustainable Investing approach; and separately managed accounts for institutional investors. Pax World has a distinguished history of innovation, having launched the first socially responsible mutual fund in America in 1971. Today, Pax World is credited with being among the first investment managers to integrate Environmental, Social and Governance (ESG) or sustainability factors into investment analysis and decision making. Headquartered in Portsmouth, NH, Pax World serves the investment needs of individuals, financial advisors and institutional investors. Julie Fox Gorte, Ph.D. is the Senior Vice President for Sustainable Investing at Pax World Management LLC. She oversees ESG-related research on prospective and current investments as well as Pax’s shareholder advocacy and work on public policy advocacy. Dr. Gorte serves on the boards of Ceres, the Endangered Species Coalition, the Sustainable Investments Institute and the American Sustainable Business Council. She serves as the co-chair of the Asset Management Working Group of the United Nations Environment Programme Finance Initiatives and is on the steering committee for UNEP’s workstream on biodiversity. Dr. Gorte served as a member of the Adaptation and Response Working Group of the Maryland Climate Commission. Prior to joining Pax, Dr. Gorte served as Vice President and Chief Social Investment Strategist at Calvert. Her experience before she joined the investment world in 1999 includes nearly 14 years as Senior Associate and Project Director at the Congressional Office of Technology Assessment, Vice President for Economic and Environmental Research at The Wilderness Society, Program Manager for Technology Programs in the Environmental Protection Agency’s policy office and Senior Associate at the Northeast-Midwest Institute. Dr. Gorte received her Bachelor of Science in Forest Management at Northern Arizona University and a Master of Science and Ph.D from Michigan State in resource economics.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Dr. Julie Fox Gorte: There are lots of definitions of SRI, but perhaps the broadest concept that can be used to describe it is investing according to a set of values with regard to various sustainability indicators. For many SRI practitioners, that includes things like environmental impact, treatment of workers and communities, and product safety as well as common exclusions such as weapons, tobacco, gaming, nuclear power, and alcohol. We at Pax practice sustainable investment, which is more about value than values, and we seek to invest in companies that are better positioned not only financially, but with respect to sustainability indicators, as better investments in the long term.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Dr. Julie Fox Gorte: It used to be possible to say that SRI usually paid attention to indicators of sustainability and mainstream investment mostly didn’t, but that’s growing less true as time passes. While most mainstream investors may still say that they don’t practice SRI, there are certain sustainability factors that mainstream markets are growing far more attuned to, such as climate change, environmental impact, and safety. But the basic distinction is that SRI, or sustainable investment, looks for sources of value and outperformance under more lampposts (notably, environmental, social and governance ones) than mainstream investment.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Dr. Julie Fox Gorte: They can all be challenging, but I think environmental impact is often the most daunting in emerging markets. There is no developed country on earth that didn’t get to its comfortable living standards by compromising environmental integrity to some degree, and sadly that pattern shows no sign of changing in emerging markets. We see, for example, that China is becoming a leader in solar panel manufacturing, but that some manufacturers there are less than careful about what they do with their waste, some of which—like silicon tetrachloride—can be quite damaging and even deadly. We also often see emerging markets with decent environmental statutes that tend not to be enforced very assiduously, especially when it comes to home-country companies (everyone loves to go after multinationals).
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Dr. Julie Fox Gorte: The highest hurdle in ESG analysis in emerging markets is getting reliable information. Emerging markets are strikingly different from each other—in fact, so are developed markets—and differ wildly in terms of access to reliable information and consciousness of ESG issues. In Brazil, for instance, it’s fairly straightforward to get information on workplace practices and diversity, and often on environmental impact. In Russia, with few exceptions, it’s surpassingly difficult to find any information (except what’s in the news) at all, and companies disclose almost nothing. China is all over the map; some companies provide a lot of information and some provide basically none. And while we don’t just look to companies to provide the information we use, it is also fair to say that most developing countries don’t make a lot of regulatory data available, at least not in English, from government websites, as many US and European government agencies do now. It’s usually possible to get some basic governance information, especially in markets that have robust financial exchanges, but environmental and social information are quite patchy in emerging markets.
Emerging Markets ESG: In 1971, Pax World launched the first SRI mutual fund in the United States of America. How has SRI evolved in the United States during the past four decades? What role do emerging markets play in SRI in the United States today?
Dr. Julie Fox Gorte: To me, one of the most striking changes was the shift from SRI, which often involves exclusionary screening, to sustainable investing or ESG integration, which is more about seeking durable value. There is an abundant academic literature—I’ve collected nearly 200 studies—showing that companies or funds that incorporate one or more of the parameters of sustainability perform at least as well as, and often better than, those that don’t. Interestingly, several of those studies show that the same is true in emerging markets as well as developed ones.