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 Stephen Jordan, Co-Founder and Senior Partner, IO Sustainability, Washington, DC, United States of America.
IO Sustainability, LLC is a strategy, research, and public affairs firm specializing in issues at the intersection of business, government, and civil society. The “I” stands for: Impacts that deliver economic, environmental and social value; Innovations required to deliver enduring Impacts and Insights that help clients and partners to see around corners as they make their sustainability journey. The “O” stands for the practical, solution-oriented Outcomes it delivers in service to clients and partners, whether they are businesses, social enterprises, non-profits, multilateral organizations, government agencies, responsible and socially conscious investors or consumers. “Sustainability” asks organizations to find ways to make as many as possible better off, without making anyone or anything worse off. IO sees this philosophy as driving the flame of innovation, leading to better designed products, services and strategies that support people, planet, and deliver long-term profits and resources. It’s not an easy philosophy to embrace or put into practice, but IO is built to meet it, and its mission is to help clients and partners who share this vision too.
In 2000, Stephen Jordan founded and served for 12 years as executive director of the Business Civic Leadership Center, a not-for-profit 501(c)-3 affiliate of the U.S. Chamber of Commerce focused on corporate social responsibility and public-private partnerships. He is the author, co-author, or editor of numerous publications on corporate responsibility, business ethics, and global development, including “One Step Forward, Two Steps Back: A Brief History of Corporate Citizenship and Corporate Social Responsibility” and the “Role of Business” series of reports on corporate contributions to various social and environmental issues. Before founding BCLC, Stephen served as executive director of the Association of American Chambers of Commerce in Latin America. Previously, he worked in the publishing industry and as a legislative assistant in the U.S. Senate. Stephen serves on the Board of Directors of the Center for Policy on Emerging Technology, the Board of Advisors of the Corporate Responsibility Officers Association, the U.S. Commission for UNESCO, and is a fellow of the Caux Roundtable. Stephen holds an MBA from Georgetown University and an MA in Political and Social Thought from the University of Virginia with high academic honors from both institutions. His practice areas are enterprise-wide corporate responsibility and sustainability strategy, business and non-profit development strategy, marketing and advocacy strategy, public-private partnership development, stakeholder relationship management, social capital and trust-building, social impact and socially responsible investing, resilience, and disaster recovery.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Stephen Jordan: Socially Responsible Investment (SRI) ideally is the discipline of investing in projects, products and services, and enterprises that deliver profits and environmental, social, and governance benefits for the long-term. In practice, SRI often is the justification for investing in projects and businesses for non-economic reasons.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Stephen Jordan: Normative considerations and different sets of factors.
Mainstream investors are not uniform, but their styles focus on various business conditions or technical factors. This is why you have Growth or Value or Large Cap or Small Cap or Momentum investing styles and so on.
Socially responsible investors are not uniform either. Some are motivated by secular ideals, others by religious beliefs. Still others are trying to achieve various political or social outcomes through their ownership of particular businesses. They see the business or businesses that they invest in as vehicles to achieve certain human rights, environmental, social, governance, or labor goals.
But SRI also encompasses aspirational investing, and this is an area that is increasingly interesting a number of people, particularly in emerging markets where Bottom of the Pyramid (BoP) thinking has taken hold. In this context, SRI investors also look at the cascade effects of their investments. For example, investing in wireless phone service in emerging markets like Haiti has important health care and literacy consequences because it builds the capacity of health care providers and teachers to connect to outside resources. Likewise, investing in truck routes and railroads can bring new service providers into global supply chains. Now, a mainstream investor may see these same investments as generating a good ROI, but an SRI investor might get to the same conclusion faster because of the additional social filters that they apply to their analysis.
In this regard, new SRI analytical tools, such as the tools that IO is working on, may help SRI investors get to some markets and identify growth opportunities at earlier stages.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Stephen Jordan: I would argue that it is not the lack of any single supporting factor, but the lack of the complex of supporting infrastructure that companies in mature markets have. If you look at global trade and investment, the OECD countries plus the next eleven – the “Top 50” if you will, generate roughly 90% of the world’s GDP, and have the most diverse and differentiated economies. They depend on 16-18 critical infrastructures that support the development of financial, human, and social capital. These include a complex of education and health care systems, information liquidity, governance, transportation, communications, capital markets, food and water management, courts and arbitration that function and reinforce each other to a greater or lesser degree.
The more early stage the economy is, the narrower the resource base, the less developed the infrastructure support system, and the more “personalist” and low-trust the political system. This is not to say that world class companies cannot emerge out of Peru or Nigeria or elsewhere, but they have less of a support system around them than companies in the U.S. or European Union. This means they have less access to domestic capital, less access to qualified workers, less connectivity, and higher access costs to global markets. In other words, the most challenging issue for companies in emerging markets to manage is their lack of social, political, and economic supporting infrastructure.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Stpehen Jordan: Governance without a doubt, or rather, if I can re-frame the question, the social capital of the firm. Even in the most ethically challenged countries there can be highly ethical corporate cultures, and sometimes external facades can mask deeply flawed internal cultures. Here in the U.S., before Enron became a byword for corporate greed, it frequently appeared on “Most Admired” lists. The same can happen in reverse in emerging markets – you could have a great company in a bad system, but it is difficult for global investors to identify these hidden gems.
There is a reason investors often have a “home bias” – they have a comfort level with their own cultural mores and a feeling that they can sense shifting market and business conditions faster. They feel like they know and can identify with the management and the people better. You can look up the environmental conditions of a particular geography, and you can get standard reports about education, health, crime, and other social factors, but relational dynamics are much harder to quantify and determine.
At the end of the day, no matter where you invest, you are investing in people, their character, and their potential.
Emerging Markets ESG: From your perspective, where do SRI and sustainability converge in emerging markets? Which SRI opportunities in emerging markets appear most promising? What role can US impact investors play in SRI in emerging markets?
Stephen Jordan: Over the weekend, I heard a fascinating presentation about Napa Valley, and how it retained its character. Roughly 40 years ago, the county commissioners agreed to a tax structure that taxed land on the basis of its agricultural production, and not on its potential commercial or re-sale value. The result is that the land retained its character and allowed Napa to develop a unique wine culture. Likewise, back in the 1950s, when North Carolina was one of the poorest states in the U.S., several business leaders, the governor, and the presidents of Duke, UNC, and NC State Universities agreed to set up Research Triangle Park. Today, that area is one of the richest, highest educated communities in the United States.
I share these stories to illustrate that SRI and sustainability converge around vision, not around any single factor like agribusiness or higher education per se. Countries like Chile and South Africa, and regions like Central America and East Africa tend to attract a lot of impact investors, not because they share the same characteristics, but because they have diverse possibilities.
For social investors like me, Brazil, India and Bangladesh are places that have a natural pull because the needs are so apparent and the scale so enormous. Rio in particular, needs to make huge infrastructure and environmental upgrades to get ready for the 2016 Olympics. This would be a natural showcase for many social impact demonstration projects.
India has so many needs, but just focus on one sector – energy. Can you imagine blackouts affecting as many as 300 million people at one time? How do you help over a billion people get better, lower cost, more reliable access to energy, but at the same time, figure out ways to reduce carbon emissions? We are working with a firm right now that is trying to solve that puzzle.
Bangladesh is another interesting case study. The country is so poor, and textiles so important, that the concerns about factory conditions are literally life and death on more than one level. Figuring out better building design and infrastructure would have a huge social impact.
In general, I think the future of emerging market development is going to be about the future of regional planning and systems integration, but in the short-term, there are huge needs for practical, sustainable energy solutions, construction and housing, communications, and logistics.