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 Gustavo Pimentel, Partner, Dinamus, Rio de Janeiro, Brazil.
Dinamus is a Rio de Janeiro-based boutique consultancy on sustainability and innovation led by 3 partners and currently with a team of nine full time consultants. Its sustainable finance and responsible investment team advises financial institutions on incorporating ESG into core business operations, such as environmental & social risk management in credit and project finance, ESG integration in investment analysis across asset classes, and development of products with ESG additionalities, such as theme and impact investments. Its clients are banks, asset managers, pension funds, service providers, NGOs and multilateral financial institutions with an interest in the Brazilian market. Gustavo Pimentel is a partner at Dinamus, leading its Sustainable Finance and Responsible Investment team. A specialist in corporate responsibility and sustainable finance, he currently chairs the ESG Integration Working Group of the Brazilian Principles for Responsible Investment (PRI) Network. As a consultant, Gustavo advises corporates and financial institutions on integrating environmental and social issues into strategy, management and decision making, serving clients such as IFC, IDB, Itaú, MSCI, UNDP, Votorantim, Fibria, Bunge and Sebrae, among others. Until 2008, he also coordinated the Capital Markets Working Group of LASFF – Latin American Sustainable Finance Forum – and managed the influential Eco-Finance Program at NGO Amigos da Terra – Amazônia Brasileira. His early career entailed finance and consulting positions in ABN AMRO, SR Rating and Accenture. Gustavo has a B.Sc. in Economics from the Federal University of Rio de Janeiro and an International MBA from IE Business School. He regularly speaks at industry events and writes a monthly column to renowned Brazilian newspaper Folha de São Paulo.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Gustavo Pimentel: SRI is the investment style that takes into account the investor’s morals and ethical principles, along with economic goals. These morals and principals are usually related to the social and environmental consequences of investment and ownership decisions, either on a local, national or global level. The SRI style is well grounded by the universal owner as well as the behavioural finance theories, although it is important to note that the extra-financial themes SRI investors are interested in do not necessarily need to converge, albeit a set of core themes tend to resonate well to the majority, such as human rights and environmental performance.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Gustavo Pimentel: As opposed to mainstream and investors practicing so called “ESG integration,” SRI investors do not require that ESG issues are material to investment returns in order to make their decisions. Again, the SRI style has to do with the belief that ethical principals must be abided by, and SRI investors are willing to take measures to protect the long-term stability and viability of markets (universal owner theory), even if this sacrifices short-term returns. In other words, mainstream and “ESG integration” investors are responding to a changing environment; SRI investors are shaping it.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Brazil to manage?
Gustavo Pimentel: Brazil has a strong but complex regulatory framework in both the environmental and social dimensions, making it challenging for companies to even stay in compliance. Because law enforcement tends to be low and erratic, there is opportunity for a “cowboy” management style of these issues, but larger (listed) companies are usually close to compliance, and even applying international best practice, especially if they do business with other continents. The social dimension tends to be more difficult to manage: issues such as poor labor standards in the supply chain, occupational health and safety culture, community relations and acceptance, as well as the war for qualified talent are of utmost importance now.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Brazilian companies to analyze?
Gustavo Pimentel: As in the rest of the world, social issues tend to be more intangible, and often impacts are related to the value chain and not direct operations, making it more difficult to analyze. But in Brazil, because the judicial system is so slow, there are major risks to investors in both the environmental and social dimensions, because companies tend to “cook” liabilities by heavily defending themselves in the courts and not adequately reporting these litigation risks. Investors must also be very wary of companies’ investment projects, because the formal environmental licensing process, which includes social issues, tend to become ever more problematic and challenged in the courts. As companies expand operations to more sensitive regions within the country, including but not restricted to the Amazon, the social license to operate becomes ever more important.
Emerging Markets ESG: How and where do CSR, ESG reporting, SRI and sustainability intersect in Brazil?
Gustavo Pimentel: Because Brazil never had a SIF-like organization, all these complementary topics converge at the PRI Brazil Network, which was the first local network created by PRI and now serves as a model for their work in other countries and regions. The local network has working groups to deal with each principle.
On ESG Integration (principle 1), whose Working Group I chair, we are working on assessing materiality of ESG issues by sector for the Brazilian business environment. We are also engaging sell side analysts and brokers to embed ESG into their research, working closely on guidelines with APIMEC (the Brazilian Investment Professionals Association).
On ESG reporting, the network works closely with the GRI Focal Point Brazil, promoting the GRI framework among companies. Brazil has a relatively high level of ESG reporting for emerging markets, and keeps improving, with some companies already testing the Integrated Reporting framework.
We also work with ABRAPP (national pension fund association) to raise awareness among pension funds and get new signatories. ABRAPP is a long time sponsor of the CDP Brazil report, launched every year in their annual congress. Another working group is dealing with the pensions regulator PREVIC, which requires funds to disclose in their annual investment policies whether they take ESG issues into account. The pensions regulation also encourages SRI, because funds may allocate more to listed equities if they prove there is good ESG integration.
Other organizations are working to advance the concept, such as Ethos Institute and the Brazilian Business Council for Sustainable Development (CEBDS). To summarize, there is already a strong ecosystem to move SRI and ESG forward in the country.