Five Questions about SRI – Weekly Expert Interview with Professor Anthony F. Buono, Founding Coordinator, Alliance for Ethics and Social Responsibility, Bentley University, Waltham, Massachusetts, United States of America – January 4, 2013

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, the inaugural interview of 2013, is with Professor Anthony F. Buono, Founding Coordinator, Alliance for Ethics and Social Responsibility, Bentley University, Waltham, Massachusetts, United States of America.

Bentley University is one of the nation’s leading business schools, dedicated to preparing a new kind of business leader – one with the deep technical skills, broad global perspective, and high ethical standards required to make a difference in an ever-changing world. Its rich, diverse arts and sciences program, combined with an advanced business curriculum, prepares informed professionals who make an impact in their chosen fields. Located on a classic New England campus minutes from Boston, Bentley is a dynamic community of leaders, scholars and creative thinkers. The McCallum Graduate School emphasizes the impact of technology on business practice, in offerings that include MBA and Master of Science programs, PhD programs in accountancy and in business, and customized executive education programs.  Bentley University has continually promoted a sense of ethics, civic engagement, social responsibility and sustainability through teaching, research, corporate and community relations, and its campus culture. Beginning in 2003, these efforts were given even stronger emphasis through the Bentley Alliance for Ethics and Social Responsibility (BAESR). A collaborative effort involving an array of campus-based centers and initiatives, BAESR is intended to build on, enhance and extend the work of the Center for Business Ethics, the Bentley Service-Learning Center, the Valente Center for Arts and Sciences, and the Center for Women and Business. Key campus-wide initiatives include Bentley’s membership in the UN Global Compact’s Academic Network (PRME) and the Conscious Capitalism Institute, the University’s diversity efforts, the Graduation Pledge and its Civic Leadership Program, Institutional Review Board (IRB), Academic Integrity Policy, and Bentley’s Office of Sustainability.  BAESR’s mission is to amplify, enhance and extend the work of these various centers and initiatives, supporting and encouraging greater awareness of, respect for and commitment to ethics, service, social responsibility and sustainability in its research, curricula and campus culture.  In pursuit of this mission, BAESR:  supports and encourages collaborative and transdisciplinary applied research that has the potential to significantly affect current practice; influences curriculum development and pedagogical innovations intended to make its students more ethically sensitive and socially aware; ensures a broader application of these principles and ideals in campus life; attempts to foster lifelong civic engagement among its students; and seeks to partner with external organizations, academic and professional associations, and corporations in pursuit of these goals. The Bentley Alliance was created and is coordinated by Anthony F. Buono, Professor of Management and Sociology. He is also a former Chair of Bentley’s Management Department. Tony’s primary research, teaching and consulting interests include organizational change, inter-organizational strategies, management consulting, and ethics and corporate social responsibility. He has written or edited sixteen books including The Human Side of Mergers and Acquisitions (1989, 2003), A Primer on Organizational Behavior (7th ed., 2008), and, most recently, Exploring the Professional Identity of Management Consultants (2013) as part of his Research in Management Consulting series (Information Age Publishing). His articles and book review essays have appeared in numerous journals, including Academy of Management Learning & Education, Across the Board, Administrative Science Quarterly, Human Relations, Journal of Organizational Change Management, and Personnel Psychology.  A past and current chair of the Academy of Management’s Management Consulting Division, Tony consults regularly with numerous organizations and professional associations, focusing on interorganizational strategy and integration, organizational change, and management development. He is also a Research Fellow with Bentley’s Center for Business Ethics, and has received Bentley’s highest honors for both teaching and research. He holds a B.S. in Business Administration from the University of Maryland, and an M.A. and Ph.D. with a concentration in Industrial and Organizational Sociology from Boston College.

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

Professor Anthony F. Buono:  The most straightforward way to conceptualize SRI is the focus on ESG-related activities – Environment, Social and Governance. Emphasis is placed on those sustainable corporate practices that promote environmental stewardship, social responsibility, and governance that encourages positive social impact. A growing number of investors are being attracted to those firms that “do good” while they also “do well,” in essence, those companies that create broader social as well as financial wealth – dollars and “sense.”

As an example, one of my Bentley colleagues, Raj Sisodia, is involved in a long-term research project on what he refers to as “Firms of Endearment” and “Conscious Capitalism.” These companies are committed to a higher purpose, with a basic orientation toward fulfilling the needs of all their stakeholders through committed and conscious leadership and management. As he has found, these firms not only do very well from a financial standpoint but they also have a positive impact on society. Beyond financial wealth, these firms also create many other forms of wealth – committed and more fulfilled employees, highly satisfied and loyal customers, innovative and profitable suppliers in their value chain, and thriving and healthy communities. These are the types of companies that more and more investors are looking to.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Professor Anthony F. Buono:  SRI investors are, of course, interested in the financial return of their investments. However, they also look to the broader societal impacts of that investment. As a result of their growing numbers, investment houses are increasingly making this option available – the amount of money invested in SRI has been increasing exponentially – and they work with companies to enhance their performance, emphasizing the “triple bottom line” rather than solely focusing on financial returns. Many SRI investors are also seeking to create wealth in underserved communities, often on a world-wide basis. In support of this movement, a number of associations like the Forum for Sustainable and Responsible Investment are committed to advancing investment practices that help build a more sustainable and equitable economy.

A related dimension of SRI concerns shareholder advocacy, especially from large institutional investors, to bring about social change. As an example, following the recent tragedy in Newtown, Connecticut, which has readily raised the national consciousness about the need for more stringent gun control, CalSTRS (the California State Teachers’ Retirement System) is reviewing its holdings in firearms companies after it was determined that one of those firms manufactured one of the weapons used in the school massacre. Although the federal assault weapons ban expired in 2004, California still has its own ban, and pressure is mounting to ensure that CalSTRS (as well as CalPERS, the California Public Employees’ Retirement System) does not have any investment in firms that produce firearms that are illegal in the state.  As a result of such pressure, Cerberus Capital Management, a leading private investment firm in which CalSTRS has a significant investment, announced that will sell its holdings in the Freedom Group International, the manufacturer of the military-style rifle used in the carnage.  Similar types of pressures are being exerted on firms in general, increasingly worldwide.

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

Professor Anthony F. Buono:  All three areas are quite challenging in emerging markets, and they vary from market to market. Given the unique nature of the various needs and demands that exist from country to country, you find different levels of emphasis on these themes – and local needs can very well differ from the desires and expectations of the larger investment community. Consider the cultural differences across societies – what might be considered a critical social risk in one country can reflect the norm in another. While we are becoming increasingly concerned about climate change, economic conditions in emerging markets can limit the willingness and ability of firms to deal with such externalities. We are also lacking a strong consensus as to what actually constitutes good governance practices. Transparency, conflict of interest, stakeholder representation, for example, can mean very different things from company to company, society to society.

Although the situation is beginning to change, companies in emerging markets also tend to be subject to less scrutiny than their counterparts in developed markets. Corruption, which is much more prevalent in emerging markets, can expose investors to unanticipated risk and vulnerability. As a recent (June 2012) report by Sustainalytics (an Amsterdam-based firm) on ESG Risks in Emerging Markets underscores, these risks can vary significantly. Deforestation and interaction with indigenous people are gaining increased attention in Brazil, for example, while depletion of water resources is a more critical area of concern in India. Product safety and quality, as well as working conditions, are garnering more attention in China, while in Russia governance structures that discourage influence from foreign investors are seen as a growing risk.

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

Professor Anthony F. Buono:  The same set of dynamics operates at the analyst level. One of the fundamental challenges we have faced is the lack of in-depth, reliable data that provide useful insight into these extra-financial endeavors – in all three areas. Change, however, is occurring. Despite the point made above about differences from society to society, there is a trend toward greater convergence in business practice. The United Nations Global Compact (UN GC) – a voluntary initiative that now includes over 7,000 firms worldwide – focuses on 10 universally accepted principles covering human rights, labor, the environment and anti-corruption as a basis for responsible business. One of the dimensions of the Global Compact is reporting. In a joint project with the UN-backed Principles for Responsible Investment (PRI), the UNGC has launched an initiative to improve company-investor communications on ESG information. Combined with related international reporting developments – such as the Global Reporting Initiative (GRI) – as well as regional efforts – for instance, Brazil’s Ethos Institute for CSR and its Ethos Indicators – we are making significant strides in environmental reporting and capturing sustainability initiatives. The GRI, for example, has a Sustainability Disclosure Database that provides access to sustainability-related information through which users can compare levels of disclosure among GRI- reporting organizations.

The development of this type of reporting database is, of course, an iterative process and it takes time. While we are making some good progress with respect to the environment and many social initiatives, governance-related information is lagging. One of the underlying challenges is to more clearly identify, define and operationalize consistent social and governance impact metrics that investments can be measured against.

Emerging Markets ESG:  How can academic study, awareness, engagement and research at business schools influence the development of SRI in emerging markets

Professor Anthony F. Buono:  Significant change is ongoing within our business schools as well, with the underlying goal of creating a new mindset about the role of business in the next generation of business professionals. A leading force in this change is the UNGC PRME – Principles for Responsible Management Education. Many, if not most, of our leading business schools are revamping their curricula, reorienting the research being carried out by faculty and students alike, and enhancing their own campus operations through increasingly visible sustainability initiatives. Emphasis is being placed on developing our understanding of and ability to create sustainable value in a more inclusive, multi-stakeholder global economy.

This change is occurring on an international basis, attracting increasing participation from a growing number of schools at regional forums – for instance, the recently held 3rd PRME Asia forum, with deans and faculties from business schools in Japan, Korea, Indonesia, Malaysia, and the Philippines; and the 2nd Australian-New Zealand forum – as well as global meetings – for instance the 3rd PRME Global Forum that kicked off the Rio+20 Earth Summit in Brazil this past June.  All of these efforts are finding their way into our business schools – in research, the classroom and campus life – and these changes can only further our attention on the SRI arena. You can also see the commitment to preparing a new generation of effective and responsible business leaders in the development of business school faculty. As an example, the Central and Eastern European Management Development Association (CEEMAN) has added a track on “Business in Society” to its popular International Management Teachers Academy (IMTA) program. The next generation of business professors will have a significant influence on the mindset of the next generation of business professionals.

We are witnessing significant integration of these issues across the curriculum at business schools and universities. As I have seen at Bentley, for example, ESG considerations aren’t limited to specific electives – these concerns are at the foundation of how business is conceptualized and taught, from accounting and finance to marketing and operations. This growing emphasis will clearly reinforce the SRI movement.