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 Antonio Vives, Principal Associate, Cumpetere, Washington, DC, United States of America.
Cumpetere is the name of the consulting services and training firm of Antonio Vives, former Manager of Sustainable Development and Alvaro R. Ramirez, former Division Chief of Micro, Small and Medium-Size Enterprises (SMEs), both of the Inter-American Development Bank. Services are provided individually or in consortia of specialized consultants and speakers, put together to better serve the needs of the task at hand. Cumpetereoffers consulting and training services in the following areas: Corporate Social Responsibility (CSR) and sustainability; sustainable infrastructure finance (water and energy); financial markets development; business climate; corporate governance; and micro- as well as SME finance. Antonio Vives, principal associate, Cumpetere, is also a consulting professor at Stanford University. He is a member of the advisory panels on sustainability reporting of multinationals Abengoa and CEMEX. He is also a member of the Public Infrastructure Advisory Commission of the State of California and a member of the Steering Committee of the Global Initiative for Sustainability Ratings (GISR). He has been a member of the Investment Committee of the Pension Fund of the Inter-American Development Bank (currently holding over US$3billion in assets) for 25 years, 15 of which he served as Vice-Chairman. Mr. Vives has been a finance professor at the IESA Graduate School of Business in Venezuela, and at the graduate business schools of Carnegie Mellon, George Washington and Virginia Tech universities in the United States. He is a visiting professor at other universities in Spain, Latin America and the United States. He has lectured at over 100 international conferences. He has published numerous articles, books and chapters of books on CSR, financial management and infrastructure finance, both in English and in Spanish. The most recent books, on CSR, were published in 2011: Mirada Crítica a la Responsabilidad Social de la Empresa en Iberoamérica, Vol I (Cumpetere) (Volume II forthcoming in 2013) and La Responsabilidad Social de la Empresa en América Latina: Manual para la gestión (Inter-American Development Bank). He has written two recent papers on socially responsible investment: “Is Socially Responsible Investment possible in Latin America?,” forthcoming in Greener Management International, April 2013, and “Sustainability indices in emerging markets: Impact on responsible practices and financial market development,” Journal of Sustainable Finance and Investment, Volume 2, Numbers 3-4, pages 318-337, 2012. Mr. Vives, a Spaniard, holds a Master’s degree in Industrial Administration (MBA), and a Ph.D. in Finance (Corporate Finance and Capital Markets) from Carnegie Mellon University in Pittsburgh, Pennsylvania.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Antonio Vives: A relatively simple definition is investments in marketable securities and projects that incorporate Environmental, Social and Governance (ESG) criteria in their selection and management. Obviously these criteria encompass an extremely wide range, from simple negative screening (excluding investments in specific sectors that contribute negatively to ESG) to positive screening (proactively looking for investments that make a positive contribution). While both are legitimate versions of SRI, I consider those with negative screening to be “greenwashing,” as they do not make any contribution to making the world a better place. Companies will not change sectors because somebody does like their activities. This type of investment should not be called SRI.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Antonio Vives: As mentioned in the previous response, SRI uses ESG criteria and mainstream investment relies mostly, but not exclusively, on financial criteria. Mainstream investors also tend to incorporate governance criteria, as financial analysts and investors tend to consider these “managerial” issues related to financial performance. Unfortunately very few see the very large impact of the other E and S factors.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Latin America to manage?
Antonio Vives: In general the most difficult issues are social issues, because society´s expectations about companies are very high. The combination of weak governments, especially local ones, in providing social services and the large unmet needs of segments of the population increase the pressure on companies to go beyond the normal responsibility to society and provide some services that are not directly related to company activities. Some manage this through foundations or direct philanthropy, sometimes more that through sustainability activities.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Latin American companies to analyze?
Antonio Vives: Only about 1.600 companies are traded on stock exchanges and of those, only 10%-20% have enough liquidity to be considered part of investors’ portfolios. Most of the investment is done by institutional investors as there is very little tradition of investment by retail investors. All of the ESG factors are a big challenge as there is very little information disclosed. With the exception of Brazil, very few companies publish sustainability reports. There are only two sustainability indices in stock exchanges in Latin America that would provide a surrogate for sustainability information, one in Sao Paulo with strong tradition (since 2005) and the one in Mexico recently created (2012). This limits severely the universe of potential investments.
Emerging Markets ESG: I would like to borrow from the title of your forthcoming paper, “Is SRI possible in Latin America?” The SRI community is informed about what is happening in Brazil and in Mexico. What is happening in other countries?
Antonio Vives: Very little or nothing. Only Chile and to a lesser extent Peru and Colombia have stock markets with enough securities and liquidity for investors to consider. But even there, with the exception of pension funds, the rest of the institutional investors are not well developed. And while sustainability and its reporting are advancing very rapidly, the marriage of supply and demand of responsible investment has yet to develop. Financial analysts and institutional investors do not have sustainable investments as a priority. There is a vicious circle: They do not push investments to create demand and there is no demand because they do not promote responsible investment. As an example we can point out that, with the exception of Brazil (60), in the other five countries there only two signatories of the UNEP Principles of Responsible Investment.