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 Sonia Kowal, Director, Socially Responsible Investing, Zevin Asset Management, LLC, Boston, Massachusetts, United States of America.
Zevin Asset Management believes that the best way to make money for its clients is not to lose it. Since no one can predict the future, its approach is to reduce risk by investing to minimize losses in a variety of possible poor markets. It is proud to compare the results it has achieved for its clients with this approach to investment managers that do not apply social screens. Zevin Asset Management are conscientious investors who consider environmental, social, and governance factors not only for ethical reasons but also as a marker of strong and enduring companies. In its opinion, the primary reason to apply screens and to engage in shareholder activism is to achieve improvements in companies’ behavior.
Sonia Kowal is Zevin’s Director of Socially Responsible Investing. She incorporates sustainability discussions into investment decision making and manages environmental, social, and governance research, proxy voting, as well as the corporate engagement strategies of the firm. She also oversees the firm’s marketing, advisor, and client relationships. Previously, Sonia headed Ethical Investment Research Services’ (EIRIS) US office in Boston where she was a Senior Research Analyst. She has also worked for over six years as a Portfolio Manager and Investment Research Analyst at Baillie Gifford in Scotland where she had responsibility for investments in Emerging Markets. Sonia holds a BS in Zoology from the University of Edinburgh and an MS in Investment Analysis from the University of Stirling, Scotland . She is an active member of US SIF (the Forum for Sustainable and Responsible Investment) as well as the Sustainable Investment Research Analyst Network and sits on the steering committee of US SIF’s International Working Group.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Sonia Kowal: I would define SRI as simply investing with a conscience. What that means at Zevin, for both social and investment reasons, is focusing on well-managed companies with sustainable business practices capable of delivering worthwhile returns for a number of years. We are mindful of environmental, social, and governance factors when picking stocks but they neither guarantee nor prevent successful investments. We endeavor to avoid holdings in industries that are intrinsically unacceptable, like tobacco, weapons of war, handguns, and nuclear power plants. We also try to select sustainable companies based on how well they respect their stakeholders as well as the natural environment and we vote in a conscientious way. Our shareholder activism includes initiating company dialogues and filing shareholder resolutions on behalf of our clients. This is all done to achieve improvements in companies’ behavior. Our clients’ portfolios are invested globally so we have to make sure to integrate SRI criteria across all of our asset classes and regions. We are proud to compare our investment results to stock indices and investment managers that do not apply socially responsible criteria to their investments.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Sonia Kowal: Having been a mainstream analyst and portfolio manager for a large institutional investment company and now working at a small SRI focused boutique, I feel well placed to answer this one! In my mind, the main difference is that socially responsible investors are cognizant to the responsibility of share ownership. I find many mainstream investors are reluctant to ponder this concept, perhaps because this recognition might alter the comfortable ways in which they interact with markets. SRI, at its best, instructs practitioners to look at investments in a more holistic way but this often complicates the investment process because many more variables should be used in making investment decisions, both from a top down and bottom up perspective. I may be biased but I don’t think most mainstream investors have the capacity or the interest to truly understand a company in its entirety like the best SRI investors do. Two of the most pleasing things about working in SRI are our clients who, almost without exception, are fantastic and the experience of working collaboratively with colleagues at other firms and learning from each other. This spirit of cooperation rather than competition has been a breath of fresh air and is very unique in financial services.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Sonia Kowal: They are all challenging! For the most part, executives at emerging market companies have not had a history of focusing on these issues and in many cases, there hasn’t been the same push from governments, NGOs and consumers to press management on these issues as has happened in many developed economies. That being said, it is unfair to paint all emerging markets with the same brush. In emerging markets there are great differences between regions. Leading Brazilian and South African companies often seem to have more in common with each other than they do with companies in neighboring countries. There also appears to be a substantial gap between companies doing a great deal (often at a similar level to their developed country peers) and those doing little or nothing. As one starts to look beyond the very largest companies, corporate responsibility in emerging markets is far less common. However, the role of local civil society, investors, and stock exchanges is likely to have a growing impact on the development of corporate responsibility going forward. Many of the mistakes that have been made by companies in developed markets pressured by shareholders to show good short-term results at the expense of long-term prospects should not be emulated by their emerging market peers. Accountable boards with representation from labor and other stakeholders are attuned to the long term interests of shareholders which includes many facets of corporate social responsibility so necessary to a company’s and a country’s success. This is a tremendous opportunity for emerging market companies to leapfrog the achievements of their developed market peers.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets companies to analyze?
Sonia Kowal: A lack of consistent disclosure on environmental, social and governance themes is a feature of companies around the world but the problem is especially stark in emerging markets. This is tied with a tendency among emerging market investors in particular, towards short-termism, that is to always be looking for a slightly higher interest rate or currency arbitrage opportunity. Corporate social responsibility indicators, while being a good proxy for management for long-term investors, are often ignored by these hot money flows. These flows of money with their attention deficit disorders are detested by the leaders of emerging market countries and institutions as they create large economic imbalances and are especially unreliable, being withdrawn just when they are needed most. Directed perhaps by policies set by forward thinking stock exchanges, investors and multinational corporate leaders should think much more strategically about where they are investing their money, taking corporate responsibility indicators in account rather than being uni-directionally focused on the minutia of a fleeting situation. As a result, emerging market companies will be rewarded with patient capital which creates long-term value. Although it is naïve to think that environmental, social and governance issues will affect short-term investor returns in emerging markets given the volatility of many of those markets, I believe that disparities in corporate responsibility performance may create market inefficiencies and opportunities that SRI investors can profit from. Governance is probably the most material issue in emerging markets as even mainstream investors can see that attractive valuations and superior growth characteristics don’t matter at all when there is no trust between a company and its shareholders.
As US SRI investors, Zevin included, I feel we are not doing enough to engage in dialogue with emerging market companies. We spend most of our time engaging with those developed economy companies with whom we already have relationships but neglect those, especially in emerging markets, that could most strongly benefit from our encouragement to improve. However this is a very resource intensive and lengthy process as many emerging market companies still need to be educated about what SRIs are interested in and relationships need to be established and built on before difficult issues can be tackled. And to top it off, language and cultural barriers make these sorts of engagements extra challenging.
Emerging Markets ESG: Boston and its environs are home to a number of academic institutions, institutional investors and research firms engaged in SRI. Are your clients conscious of, interested in and invested in SRI in emerging markets?
Sonia Kowal: Boston is a great place to work on SRI issues because of the density of industry colleagues working together on similar concerns. We are also lucky in that there are a great number of progressive institutions and families in New England that see the value of investing responsibly. Our clients have hired us for our commitment to competitive financial results but also for our dedication for social change. For the most part, they want and expect a high degree of attention to social, environmental and governance issues. For us and for them, financial and social/environmental sustainability go hand in hand – this is true no matter whether they are invested in developed or emerging markets.