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 reflect on what SRI in emerging markets means to practitioners;
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Tereza Kaneta, President of MZ Latin America, Brazil.
Established in 1999, today MZ Group is a multinational company and the world’s largest independent global investor relations consulting firm, providing one-stop-shop financial, corporate governance, applied technology and integrated corporate communications services.
Since 2010, Tereza Kaneta is the President of MZ Consult Latin America. She joined MZ Consult as a client executive in March 2004, moved to Managing Director for Strategic Planning in March 2005 and then Managing Director of the Consulting and Market Intelligence Business Unit in March 2008. Previously she worked as investment banking associate at Deutsche Bank in New York, as senior associate in the IR department of Telesp Cellular (Vivo) and as an analyst for Banco Votorantim. She received a bachelor’s degree in electrical engineering from the University of São Paulo (USP) and an MBA from Columbia Business School in New York.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Tereza Kaneta: SRI means incorporating social, environmental and governance criteria into the decisions taken by organizations involving investments, which makes it possible to enhance performance on each of these fronts. In the context of publicly traded companies, investors adopting these criteria conduct rigorous analyses to identify companies that are committed to observing and achieving certain rules and standards of corporate social responsibility and environmental and management practices, which ensures their money will be invested only in companies that are sustainable. So, responsible investors are those who, while pursuing their financial goals, also work in parallel to reach their objectives in a sustainable manner, by considering also the social, environmental and economic consequences of their investments.
In short, it is a new, more complex and even more sophisticated way of analyzing a company’s return. To give you a simple illustration, a company could report excellent financial results in the short term because of the lower costs it achieved by loosening its internal safety policies, but which led to a negative environmental impact, which is an impact that does not appear on its balance sheet. But from a broader perspective, this negative environmental impact in the short term could, in the medium to long term, come to have a negative effect on the business, or even lead to its closure, due to the risk of environmental damage in the community that leads the company’s consumers to stop buying their products, or due to the risk of an environmental accident that halts production and forces the company to pay restitution for damages. In other words, in parallel to the pursuit of traditional financial return, there is a concern with the creation of value from a broader perspective that involves all stakeholders, such as employees, their families, the community and others.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Tereza Kaneta: Responsible investors are more dedicated to the quantitative and qualitative analysis of the business policies, practices and impacts of the companies in which they invest. For these analyses they use the triple bottom line concept (also known as the “Three Pillars”: People, Planet and Profit), which includes environmental, social development and corporate governance aspects in the analysis of a company’s performance, which previously focused exclusively on the traditional analysis of financial return. So as they expand the scope of their performance analysis, the figure projected for financial return actually becomes more tangible, and investors gain access to more complete information that can be used to identify new opportunities for investing their money.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Brazil to manage?
Tereza Kaneta: For companies in Brazil, these three themes are equally challenging, since they still require a change in strategic direction and in the perception that still prevails of these themes, which are often associated with environmental radicalism, a welfare state and demands that are considered intrusive in a company’s day-to-day activities. But the evolution and maturation of Brazil’s capital markets, a process that was accelerated by the macroeconomic stability achieved in the country in recent years, is changing the mentality of companies, since, when seeking capital to finance their growth and ensure the perpetuity of the business, they must deal with stakeholders that are increasingly more demanding on these issues.
These mounting demands drive organizations to further their knowledge of social and environmental issues, to create policies and procedures focused on these themes, to voluntarily adopt best practices using widely accepted guidelines and codes and to continually enhance the mechanisms and tools used to measure and analyze performance on broader fronts, among other advances.
I have seen that the more the country enhances and develops laws, regulations and public commitments regarding economic, social and environmental aspects, the more companies are encouraged to structure their management and monitor the performance of each of these items. And remember that companies face another challenge, which is to disseminate social and environmental responsibility throughout their value chains, which is achieved through clear policies and effective procedures for selection, incentives and monitoring.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Brazil to analyze?
Tereza Kaneta: Just like companies, investors face challenges on these three fronts. Responsible investors must be increasingly better prepared to analyze the performance of companies on the social and environmental fronts, rather than solely on the economic front, which traditionally is their focus. For this, I believe you must be familiar with the issues and indicators that are monitored by the market, especially those presented in the guidelines, regulations, standards and codes of conduct recognized by the market, such the Global Reporting Initiative (GRI) and the United Nations Global Compact. They should also analyze the issues from the Brazilian perspective, keeping in mind that the country is still developing and presents various gaps, especially in the social area, caused by unequal income distribution, where choices must often be made that consider the economic impacts they will have on a certain community where the population’s basic needs have still not been met. So the guidelines and standards adopted for developing countries should be put into the real world context in Brazil.
Emerging Markets ESG: What role does investor relations play in improving and increasing disclosure of ESG data in emerging markets?
Tereza Kaneta: The role of investor relations is, above all, achieving positive visibility for the company’s investment thesis. Therefore, the more data and information used to create and consolidate a good investment thesis, the more effective the investor relations effort. For this reason, investor relations typically becomes a strong defender of messages involving the social, environmental and corporate governance factors inside the actual company. So it is part of our role as investor relations consultants and also as disseminators of best practices to show companies that publishing sustainability reports is already a global trend in the integrated reporting of organizations’ economic, social and environmental performance. We also emphasize that these report make it possible to monitor the indicators of the companies that choose to publish them, and also reinforce the values of transparency and credibility that, through this tool, are perceived by all stakeholders.