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 Dr. David A. Lubin, Chairman, Esty Sustainability Network, United States of America.
Dr. David A. Lubin has more than 25 years of experience successfully founding and managing technology and consulting firms that have become world leaders in the field of corporate performance management, business analytics, and new media. He currently serves as Chairman of the Esty Sustainability Network, a research consortium led by David Lubin and Dan Esty, in partnership with IBM. In that role, Dr. Lubin is directing a large scale research effort in which world leading firms are working collaboratively to develop new models for executing corporate sustainability strategy. In May 2010 he and Dan Esty published an article in Harvard Business Review entitled, “The Sustainability Imperative.” Before joining the Esty team, David Lubin served as Chairman of the Board of Palladium Group, a firm he founded with David Norton (the Balance Scorecard) to advance the application of business analytics to measuring and improving corporate performance. Prior to that he founded and led several IT companies. Before beginning his career in business, Dr. Lubin was a member of the faculties at both Tufts University and Harvard University, and the Principal Investigator on several research grants from the National Science Foundation and the National Institutes of Health. He received his Doctorate in Human Development at Harvard University in 1977.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
David A. Lubin: Socially responsible investing is the cornerstone of the now broadened concept of sustainable investing. We see the sustainable investing market as composed of a number of segments that can be distinguished by the core investor intent within each segment. The investors in the ‘socially responsible’ segment have historically been characterized as seeking to invest in firms which represent their values, even accepting the potential for some sacrifice in performance. More recently, an ‘ESG-tilt’ segment has taken shape in which the investor intent is market returns (or better) by investing in firms which meet or exceed an ESG rating threshold. We round out the picture with the with the ‘environmental’ or ‘green tech’ segment who seek above market returns by investing in new technologies that will benefit from sustainability drivers such as climate change, resource contention, new regulation and consumer preferences. Lastly, we have described a ‘sustainability premium’ segment that we believe is forming in which investors are also seeking better than market returns through investment in firms that have deeply integrated sustainability into their core business strategy and operations.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
David A. Lubin: Given our view of the segmentation model, different things in different segments. However, overall I would say SRI or sustainable investors share a view that durable long term financial performance ultimately depends upon an effective alignment of business and societal goals, and that it is increasingly possible to assess that degree of alignment at the firm level and use that information to make investment decisions. While today’s sustainability data has many shortcomings, sustainable investors see the potential to simultaneously improve the quality of life and their portfolios. I do not think mainstream investors would share that view. In fact, mainstream investors might view such considerations as likely to impair their investment performance.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
David A. Lubin: Each dimension represents its own set of challenges. The environmental issues, perhaps especially in emerging markets, typically require firms to be engaged with upstream suppliers and downstream partners or customers for meaningful results. Measurements of performance inside the firm’s four walls may not reveal a true picture of impacts. Likewise, the social and governance dimensions represent significant management challenges. They require very broad-based engagement, not only of firm leadership, but also up and down the chain of command. Management must effectively build the case for change and create the support systems needed to transform the corporate culture. We saw a similar phenomenon with quality three decades ago. For some companies, quality was just a ‘theme du jour’ and never produced significant results. For others, quality became a core driver of the corporate culture and the source of significant competitive advantage. The same is likely to be true for sustainability.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
David A. Lubin: The primary challenge in analyzing the ESG data is the problem of separating policy from performance. While it is without doubt better for firms to formulate and disclose sustainability related policy, it is often quite difficult for analysts to determine how policy relates to performance. It is often only when a problem occurs that reaches the public record that it is possible to compare performance to policy. This kind of policy versus performance gap is difficult to track across the board for many of the same reasons that they are difficult to manage, as I mentioned above.
Emerging Markets ESG: Your work focuses on the sustainability paradigm, in specific, “using environmental leadership to promote innovation, create shareholder value, and differentiate companies in the marketplace.” In your opinion, why do so many companies, in developed economies and emerging markets, still view corporate social responsibility (CSR) as philanthropy?
David A. Lubin: In part, the problem of seeing sustainability as either obligation or philanthropy – something likely to be a cost and a drag on performance comes from the history of these ideas. Two or more decades ago when ‘corporate social responsibility’ was taking root and today’s corporate executives were forming their own management philosophies, it may not have been unreasonable to equate corporate social responsibility with obligation or even philanthropy. But in the intervening decades much has changed in the world; now the ‘sustainability imperative’ as we termed it in a Harvard Business Review article (Lubin & Esty, 2010) represents a fundamental challenge firms will need to address to grow, enhance productivity and manage risks. Some executives and the firms they lead have internalized this new business paradigm and are aggressively moving forward. However, from our research, the majority says they know they will need to change and will “but later.” Most are taking small steps now, viewing sustainability as another program rather than a driving force for a new way of doing business and a source of competitive advantage for those who take the lead. As more and more firms feel the press of the sustainability imperative, the pace of management change will quicken.
We investors face our own challenge – something we have referred to as the sustainability conundrum – that is, until evidence linking firm sustainability strategies to financial performance is broadly available and accepted, sustainability will remain primarily of interest to niche players. And since sustainability still appears to most corporate leaders and the mainstream analysts who follow them as a niche interest, neither have invested in the effort to effectively describe or report on the financial impacts of sustainability on firm performance, even in many of those leading firms who are now realizing meaningful gains from executing their sustainability strategies. When more CEOs and CFOs provide the data supporting the link between their financial performance and sustainability strategies, and when more mainstream analysts help investors connect the dots, we believe sustainability will begin its inevitable rise up the corporate agenda. While progress can be seen in various pockets of activity today, addressing this conundrum is the central challenge facing sustainable investing and a gating factor in sustainability going mainstream.