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 Miroslaw Izienicki, President & Group CEO, Fifth Capital, London, United Kingdom.
Miroslaw Izienicki is President and Group CEO of Fifth Capital, a think tank and leadership counsel offering high level advisory services in support of integrative strategies for wealth creation, governance and sustainability. Within a globalised political economy characterised by complexity, Fifth Capital utilising a broad wealth architecture facilitates equilibrium between shareholder and stakeholder interests and maximises opportunities for improving aggregate economic, social and political outcomes. The Fifth Capital team combines Investment Banking experience with leading interdisciplinary thought leadership capabilities across the subject areas of Economics and Psychology – understanding the use and recognising the limitations of quantitative modeling techniques, i.e., the bounded rationality of ‘real world’ decision making, together with the effects of psychosocial influences both in the derivation of risk mandates and on performance outcomes is critical. Fifth Capital is member of TheCityUK and the Centre for the Study of Financial Innovation and is a stakeholder of the UNPRI and GRI networks. Prior to launching Fifth Capital, Miroslaw Izienicki was Head of Corporate Finance at Nikko Europe.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Miroslaw Izienicki: The globalised political economy is characterised by complexity; the sustainability of the effort to create wealth has been demonstrated to rest not only on the availability of economic or financial capital but also on maintaining a broader equilibrium between shareholders and stakeholders. In addition to economic capital, enterprise needs to maintain adequate levels of social and political capital – I call this Broad Wealth.
SRI is one of the voices used to address these issues.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Miroslaw Izienicki: SRI is principally distinguished from mainstream investment by recognising that whereas experts in particular sectors tend to define risk in a narrow, technical way, e.g., price volatility, the public has a more complex view which reflects a complex framework of cultural identifications.
Within today’s globalised political economy, individual nation states are limited in their spheres of influence. Consequently, SRI is further distinguished from mainstream investment by obliging multinational enterprises (MNEs) as principal agencies of wealth creation, and other enterprises, increasingly to consider and interact with beyond what is either dictated by rational financial theory or required legally with the initiatives of multilaterals, NGOs and local communities in respect of a broad range of economic, social and political considerations.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
Miroslaw Izienicki: In historical terms, the SRI movement might be regarded as relatively recent. As such, not all activities described as responsible might be supported by a strong base of evidence in terms of their connection or contribution to portfolio return, e.g., investing in clean tech, social investment, etc. Indeed, rather than improving the ‘upside’ it can be argued that a significant role of responsible investment lies at least equally in reducing or mitigating the ‘downside.’
As more statistics are accumulated and research is undertaken, the evidence ‘boundary’ will move but there will continue to exist the possibility of some areas of responsible investment practice being described by critics as more politically motivated rather than financial. This is one reason why we work with a Broad Wealth construct that accounts for the aggregate of economic, social and political capital as none of these elements can actually be considered separate to the others – the recent banking crisis is evidence of this.
The biggest challenge for emerging market companies is to actively manage, and fund as a business cost the management of, this interaction between economic, social and political capital or, in other words, the equilibrium between shareholder and stakeholder interests.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
Miroslaw Izienicki: With the ‘mathematisation’ of economics post-Keynes and the significant advances achieved, more particularly, in portfolio mathematics, elements of the risk universe that are not (or not yet) amenable to quantification have been for the most part separated off into distinct areas of study.
However, it is increasingly recognized that it is all one ‘risk space’ and simply because something cannot be rationally quantified, as one might argue in respect of social and political affects, it does not mean it can be ignored in respect of economic outcomes – we are reminded of Einstein who said “not everything that counts can be counted and not everything that can be counted counts”. This ‘re-connection’ with the importance of psychology, which was recognized early on by Keynes, is manifest once more in contemporary guises such as Social Choice theory, Neuroeconomics, Identity Economics, etc.
In addition, we are also increasingly aware that the economic models that do exist are built upon assumptions and themselves are subject to limitations.
As such, I believe that one of the greatest challenges for investors generally is to reconnect with the concept of uncertainty and to focus more on understanding and managing the limitations of the financial models employed, the underlying systemic stability, etc. The current US Treasury Secretary was warning of this for some time before the banking crisis hit.
Emerging Markets ESG: Your expertise and the work of Fifth Capital focus in part on communication of risk to stakeholders. Which specific risks do you identify in (socially) responsible investments in emerging markets?
Miroslaw Izienicki: Risk mandates that do not account for social or political affects reflect neither the multi-dimensional engagement of risk experienced by shareholders nor the variance in weighting ascribed to outcomes across both shareholder communities and individuals.
Pension funds and other financial institutions represent substantial shareholdings in MNEs these days and, whether directly or through the use of proxy advisers, use the SRI voice to engage with investee companies to account for both financial and extra-financial activities.
Many argue their position as ‘Universal’ investors.
In my opinion, the greatest single risk to responsible investment practice lies here – institutional investors’ responsible investment credentials and their engagement practises might be undermined by a lack of transparency insofar that many judge their performance against industry peer groups rather than against ultimate beneficiaries’ requirements.
Whilst this may be acceptable in respect of financial performance, institutional investors such as pension funds and/or their proxy advisers should institutionalize their responsible investment initiatives through the derivation of beneficiary mandates, democratised at the level of their beneficiaries, which combine both financial and extra-financial risk considerations.