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 Peter Atlee, J.D., Georgetown University Law Center, Washington, DC, United States of America.
Peter Atlee previously served as a Director of Congressional Relations and Legislative Representative at a number of non-profit organizations in Washington DC, as a law clerk at a Washington-based law firm, as well as at the Washington office of a US Congresswoman and the New York and London offices of a corporate law firm. He received his J.D. degree from the Georgetown University Law Center where he was a Notes Editor for the Georgetown Law Journal and where his law review note examined corporate Liability under the Alien Tort Statute. Peter has published in The Washington Times. He co-authored a chapter on litigation expenses and SRI in The Business Case for Sustainable Finance (2012).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Peter Atlee: At its most basic level, socially responsible investment (SRI) is just investing that accounts for social norms and mores when making investment decisions; that is, it seeks to make investments that align with environmental, social, and governance, norms and avoid those repugnant to the norms.
On a deeper level, SRI is a commitment, made by companies and financial institutions, to placing social values ahead of bottom lines. Recent scholarship, such as The Business Case for Sustainable Finance, has sought to take the commitment one step further by demonstrating that socially responsible investments can be just as profitable as (if not more profitable than) socially irresponsible investment.
So, SRI is, ideally, the recognition by investors that social responsibility not only makes good moral sense but also good business sense.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Peter Atlee: Unlike mainstream investment, SRI incorporates an extra process to filter-out investments that violate international norms, thereby ensuring that the investments are socially responsible. In this way, SRI is similar to the rapidly growing world of Islamic finance. Islamic banks and financial institutions similarly use filters to ensure that investments do not violate various facets of Islamic law. And the expansion of the Islamic finance system may provide some guidelines for the future expansion of SRI. For example, the Dow Jones Industrial Average has created an index of Islamic-compliant funds to serve Islamic investors; the DJIA and similar indexes could help to expand SRI dramatically if it were to create a similar social-responsibility index.
However, perhaps the biggest challenge hindering the creation of such an index – and, in my opinion, the biggest challenge facing SRI – is a definitional one. Whereas Islamic finance includes some basic, agreed-upon, quantifiable principles, social responsibility is much harder to define and quantify. That quality makes it harder to standardize and mass-market SRI than Islamic finance. I will discuss that challenge more below.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Peter Atlee: I have to admit, this is outside my area of expertise, since my training is mostly on the legal side of SRI. But, if I had to guess, I would say governance presents the biggest management challenge to companies in emerging markets.
Businesses have some control over the environmental effects of their projects and investments, and we have gotten fairly good at predicting environmental costs. Social norms tend to change slowly in each country and around the world, giving companies fair warning to adapt their investing and business strategies to changing norms. Governance, on the other hand, is less stable. Although the norms are fairly consistent over time, each country’s practices can change suddenly and without much warning. Most of the recent changes in governance have been pro-democracy and pro-international norm – think the Arab Spring, the recent election of Aung San Suu Kyi in Myanmar, etc. But the world has had times of negative governance changes too – think the rise of Fascism in the 1930s or the potential rise to power of the radical wing of just about any “ism.” Those changes can happen surprisingly fast, and multinational corporations have little to no control over them. If a company is invested in a long-term project finance venture in a developing country that is seized by radical forces (or a democratically elected president who later refuses to relinquish power) it may be stuck with no way out other than sacrificing huge amounts of time and money. That sort of exposure is hard to predict and hard to manage.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Peter Atlee: Going back to the idea that the biggest challenge facing SRI is a definitional one, the most challenging themes are probably social and governance. Environmental impacts are, again, fairly quantifiable and predictable, and the international compacts that exist on the subject – sparse as they are – present measureable environmental goals and best practices.
Social and governance norms, on the other hand, have proved more difficult to define and quantify. Written reductions of these norms, like the UN Charter, the ICCPR, or the Universal Declaration of Human Rights, tend to be more aspirational than concrete – and buy-in from some world powers is, at the very least, suspect. It’s hard to know exactly which social and governance values we should count when analyzing social responsibility – and which values we should not count.
It’s equally hard to know how to count those values. Social and governance norms generally defy quantification and make it difficult to set compliance thresholds. Where should we draw the line between which social and governance practices are acceptable and which are not? And, for that matter, why is that the right place to draw the line? And how do we, then, measure compliance? How free do elections need to be before a company can “responsibly” invest in a country? How free do women need to be?
These are difficult questions to answer, and until they are answered, companies will have a difficult time analyzing—in an efficient way—whether their investments are socially responsible or not. So, buy-in from companies is less likely to hinder the growth of SRI than is the difficulty in creating an efficient SRI infrastructure.
Emerging Markets ESG: What is the nexus between litigation and SRI?
Peter Atlee: As Professor Mark Vlasic and I explain in our chapter of The Business Case for Sustainable Finance, the main connection is that litigation costs make irresponsible investing less fiscally appealing.
I should first note that, this fall, the US Supreme Court is expected to issue a ruling that could significantly alter the course of this discussion. (The case is Kiobel v. Royal Dutch Petroleum.) The Alien Tort Statute allows non-US citizens to sue tortious violators of international law in US courts, and the Supreme Court is expected to decide whether that law applies to corporations or not (recent litigation under the ATS has focused almost exclusively on suing corporations, often for aiding and abetting other violators). I would be surprised if the Court completely denies corporate liability under the statute, but that is a distinct possibility.
But even if the US Supreme Court were to cut off corporate liability under the ATS, plaintiffs hoping to sue corporations would still have several options for getting into courts around the world. The important is, as long as those avenues are available (and creative plaintiffs will always find a way into court) socially irresponsible investing will expose companies and financial institutions to significant liability and significant court costs. Companies hauled into court around the world could face judgments and criminal fines, attorney’s fees (sometimes just their own, sometimes theirs and the plaintiff’s), and reputation costs – just to name a few. And many of those costs start piling up even if the corporation ultimately wins its defense – making litigation costs a significant reason why socially responsible investing makes better business sense.