Five Questions about SRI – Weekly Expert Interview with Mike Scott, Founder and Director, Carbon Copy Communications, London, United Kingdom – June 22, 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 Mike Scott, Founder and Director, Carbon Copy Communications, London, United Kingdom.

Mike Scott is a journalist and writer specialising in the interface between business, investment and the environment. He is the Founder and Director of Carbon Copy Communications, which covers the entire spectrum of green issues, from the far reaches of nanotechnology to corporate sustainability, including:  carbon markets, clean technology, climate change, Corporate Social Responsibility (CSR), Socially Responsible Investing (SRI) and sustainability.  Mike has 20 years’ experience as a newspaper journalist, including nine years at the Financial Times.  He also published in other publications, including The Guardian, The Independent on Sunday and the Daily Telegraph; business magazines such as Markit Magazine, Flight International, Green Hotelier, Director and Global Investor; specialist energy and sustainability trade publications such as Bloomberg New Energy Finance and Sustainable Business; and family wealth magazine Campden FB. Mike acts as a rapporteur for Brussels-based think tank Friends of Europe and also provides corporate writing and communications services for a range of corporate clients including Deloitte, Jupiter Asset Management, PricewaterhouseCoopers, Bayer Material Services, Rabobank and Siemens.

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

Mike Scott:  SRI is investment undertaken on the basis that environmental, social and governance issues will have a material impact on the returns to investors. But it’s an evolving field – first, there was ethical investment, which puts the beliefs of investors above returns and has a strong focus on negative screening or excluding stocks that do not meet ethical guidelines. This is still the perception that many people have today of SRI, but it is an increasingly misleading view.

SRI has taken on a more positive focus in recent years, with investors looking to encourage investment in particular sectors, such as water or clean energy, or in companies that adhere to certain standards on issues ranging from resource use to child labour.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Mike Scott: It’s timeframe, mainly, I think. Mainstream investors are focused on quarterly returns and if that means ignoring longer term issues in the pursuit of short-term gains then so be it. It was a frame of mind that was instrumental in the financial crisis and typified by the sub-prime issue in the US but you can still see it today with, for example, the recent problems at JPMorgan Chase.

But concentrating on quarterly targets is not rigour – it is just chasing short-term returns and it catches up with you in the end because you start cutting corners to maximise profits.

SRI differentiates itself because it takes a longer view that seeks to produce sustainable returns over the long term by examining how companies deal with ESG risks and opportunities. Mainstream investors may be interested in ESG issues but they tend not to factor them into their investment decisions. These factors used to be called “non-financial” issues but that is no longer tenable following events such as the nuclear disaster at Fukushima, the travails of Apple over worker conditions at its supplier Foxconn or the disruptions to car companies such as Honda when floods hit Thailand last year. These are material risks and investors that fail to properly consider them are failing in their fiduciary duty.

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

Mike Scott: For companies based in emerging markets, I think they are all problematic, although environmental problems have more visibility than the others. For many family-controlled businesses, governance is a real issue as they venture out of their home markets or look to raise money on capital markets that are more developed and have deeper pools of capital but also have stricter listing requirements and expectations. In all regions, as their home economies develop they can expect to face greater regulation, and increased pressure from customers and investors to conform to or exceed international norms.

For western companies operating in emerging markets, governance is pretty well understood and environmental issues are becoming easier to envisage now that there is a price on carbon and that similar trends are observable in relation to water and even ecosystems services. What they seem to find really difficult is getting hold of social issues in their increasingly globalised supply chains – and we have seen several examples in recent years of issues such as child labour, human rights, worker conditions and even health and safety cause them problems.

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

Mike Scott: I think many of the same issues apply but as KPMG argued in a recent report, it is not just the individual ESG issues themselves that are important but the way they interact with each other in multiple ways. Take the Arab Spring. One of the ancillary causes was the increase in food price inflation that could be traced back to droughts in Russia and the Ukraine and subsequent export bans. Corruption in North Africa and Middle Eastern countries was another issue, along with income inequality and the inability of young people to get jobs in these countries. So that’s environmental, governance and social issues all coming together to kick-start revolution in the Arab world. It flows both ways, too. The Arab Spring itself is having knock-on effects around the world – it’s making China and Russia very nervous for example, but it’s also going to create opportunities for companies and investors to help these Arab economies grow.

Emerging Markets ESG:  What role do emerging markets play in the sustainability challenge?

Mike Scott: Emerging markets are crucial to the sustainability challenge. While the industrialised countries are very far from having solved all their problems, they are on the road to greater resource efficiency and have the tools to create more sustainable futures for themselves. But the emerging markets still need to grow and most of the predicted growth in consumption of all types of resources is going to come from these countries. At the same time, their current lower levels of development mean that they still have significant social and governance challenges. Given that they are going to be an increasingly important part of the global economy, it is vital both for the emerging markets and the industrialised world – whose investors will fund much of that growth – that these challenges are tackled as soon as possible.