Five Questions about SRI – Weekly Expert Interview with John Cusack, Associate Director, Financial Services Risk Management, Maplecroft Limited, Bath, United Kingdom – May 25, 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 John Cusack, Associate Director, Financial Services Risk Management, Maplecroft Limited, Bath, United Kingdom.

Maplecroft offers a range of analysis, research and consulting services to help business and investors understand the fast-changing geo-political and ESG environment in order to minimise their global risk exposure.  Maplecroft’s multi-award-winning Global Risks Portfolio (GRP) combines expert analysis of risks at local, country, issue, sector and company level, with rigorously researched quantitative risk indices and state-of-the-art mapping technology. These online resources provide horizon scanning solutions that enable organisations to identify and monitor risks to operations, supply chains, investments and assets. The GRP provides essential analysis for organisations with interests that cut across different geographies and cultures, especially in emerging markets and developing countries. In-depth country reports cover areas such as labour standards, ESG issues, political risk, and corporate governance, while Maplecroft’s indices and maps provide clients with the ability to analyse and compare over 160 issues, including: terrorism, conflict, regime stability, rule of law, resource security, water stress, corruption, human rights, poverty, climate change, infectious diseases and natural disasters.  Company research tools include Maplecroft ratings for over 500 companies, in-depth reports, and a comprehensive archive, including thousands of stakeholder viewpoints and articles from our Global Risks Forecast and Ethical Insight publications. Maplecroft has also developed an ESG Equity/Asset Screening and Engagement Tool that produces comprehensive risk profiles of companies within investment portfolios and an evaluation of their proficiency to manage those risks. The tool utilises Maplecroft and/or client ESG performance criteria and weighted company global risk scores to measure risk by industry and geography in order to identify companies with high ESG risk exposures. This is complemented by the ESG Risk Atlas and Calculator, which draws on Maplecroft’s unique portfolio of indices to allow users to generate an ESG Sovereign Risk Rating by choosing from 49 ESG risk indices and 197 countries, displaying the results in country scorecards and maps.  John Cusack heads up Maplecroft’s Financial Services Risk Management team, where he leads the continued expansion of Maplecroft’s ESG, climate, company and sustainability risk services and tools to investors, fund managers, insurers and financial institutions. Specifically, John helps clients to minimise their global ESG risk exposure, to identify promising investment opportunities, and to screen asset portfolios to evaluate compliance with internal/external ESG guidelines and standards. He has served in senior executive and advisory leadership roles with multinationals, investment managers, risk management firms, ESG rating agencies, and clean tech startup companies. Previously he founded and led Gifford Park Associates, a sustainability management consulting firm, and was CEO/Co-founder of Innovest Strategic Value Advisors, a sustainability rating metrics/investment research house. He also served as Chief Sustainability Officer of Light Green Advisors working on CalSTRS’ large-cap equities sustainability mandate investment portfolio and led the New York office of the Marsh Environmental Risk Management Consulting practice.

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

John CusackSocially responsible investment is going beyond the financial performance numbers available on past company/project/country performance, and looking at the extra-financial issues that will affect the company/project/country in the current and future marketplace and business environment. Typically, this analysis requires looking at environmental, social and governance (ESG) issues as well as economic issues. Increasingly, they are also looking at ethical issues as well.

Why are all of these important? Because these issues can be financially-material to a company’s project’s or a country’s successful performance in the global economy where information travels at the speed of light and stakeholders (including customers), as well as shareholders, are looking for responsible financial performance that produces reasonable returns at reasonable risks.

For too long, most investors had their eyes only on maximizing the returns of investments, and ignored the risks of investments, as their fiduciary responsibility. SRI investors have been among the forefront of investors pushing for looking at both returns AND risks, and integrating the real social and political costs of pollution, climate change, human rights and product stewardship into the P&L and balance statements of publicly-traded companies. After financial disasters, such as Long Term Capital Management, Enron, Tyco, Bear Stearns, Lehman Brothers, AIG and the sub-prime mortgage fiasco, mainstream investors are starting to realize the benefits of analyzing both financial and extra-financial factors.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

John CusackSurprisingly, the differential is starting to diminish. A decade ago, SRI investors were a complete minority, with a small percentage of total assets under management, and their shareholder resolutions on environmental/social issues were lucky to get 2 – 4% of shares voted at annual meetings. They tended to be religious groups with specific moral values that guided their investment screening, which led them to exclude companies not meeting their values standards.

Increasingly, now both SRI and mainstream investors realize these issues do directly affect the bottom line, revenues and costs of companies and projects, and are moving to ”best-in-class” investing, where companies are rewarded for recognising the opportunities and risks of ESG issues and are downgraded for not managing these risks and opportunities. As a result, SRI-related shareholder resolutions on issues like climate change and executive pay are now winning support from 40-80% of shareholders, which indicates mainstream and SRI investors are in agreement on the importance of these issues.

Investment managers, driven by ultimate owners, such as pension funds, endowments and high-net worth individuals, are increasingly engaging with companies with high risk profiles and low risk management proficiency to change their ways before they become problematic investments, rather than just excluding them from a portfolio. The borders between mainstream and SRI investors have blurred. Large asset managers, such as BlackRock, report that over 10% of the $3 trillion of assets they manage have some sort of formal ESG screen now and many asset managers are informally incorporating ESG research into their investment analysis. We see this at Maplecroft, where the interest from both mainstream and SRI investors in our global ESG Atlas and Risk Calculator tool and in our Portfolio Engagement and Screening tool have skyrocketed recently.

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

John CusackFor the companies, the hardest parts of risk to manage are often the local country political and ESG risks, as many of them are beyond their direct control, and have to be managed with great finesse and delicacy.

Maplecroft tracks over 160 of these issues within its portfolio of global risk indices. We therefore see risk trends developing within the emerging markets. Some of these issue companies need to monitor and manage very carefully, lest they curtail their ability to operate successfully and leave themselves open to reputational damage. These include controversial governance issues, such as corruption, complicity with oppressive regimes; social risks, including human rights; and environmental challenges, which encompass issues like water stress and loss of biodiversity.

Areas where they do have direct control, such as how they treat their own employees and how they apply global environmental standards can be easier to manage. The key is to identify and manage your risks professionally and proficiently in high-risk emerging markets countries, so that the higher economic returns and benefits of operating in fast-growing countries are not lost to poor risk management.

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

John CusackOne of the major problems for investors is the lack of high-quality and timely ESG and political risk data and trend analysis from rapidly-changing economies in emerging markets in a form and language that they can understand, which they can’t find by just “Googling” it from a desk in New York, London or Hong Kong. That is why Maplecroft often uses on-the-ground regular visits by our research analysts to the countries for which we provide our clients country risk reports, and has assembled large data bases of risk data from reliable and documented sources.

However, I must say that the information quality and quantity of ESG data have both improved tremendously in the last decade. At Innovest in the late 1990’s we spent 80% of our time finding ESG data, and 20% analyzing it- now those percentages have reversed for many parts of the world.

Emerging Markets ESG:  Are risk analysis, risk management and risk mapping in emerging markets fundamentally different from risk analysis, risk management and risk mapping in developed markets? 

John Cusack:  I would argue no, in that basic risk analysis, management and mapping in both the developed and developing worlds are still aimed at identifying potential investment risks and opportunities, and then managing those risks and opportunities to provide a balance of risk and return within an investor’s fiduciary responsibility to meet their client’s reward goals at a reasonable and responsible level of risk.

Increasingly, those client goals include ESG criteria as well as financial performance criteria. In the future, that responsible balancing of risk management and opportunity management will separate the winners from the losers, and eventually lead to more integration of ESG factors into the investment decision-making processes for both mainstream and SRI investors.