Five Questions about SRI – Weekly Expert Interview with Sashi Reddy, Lead Portfolio Manager, First State Indian Subcontinent OEIC, Singapore – June 21, 2013

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 Sashi Reddy, Lead Portfolio Manager, First State Indian Subcontinent OEIC, Singapore.

FSS Logo JPG formatFirst State Stewart is an autonomous team within First State Investments, a specialist asset management business owned by the Commonwealth Bank of Australia, and currently has over $50billion in funds under management. Since the launch of the Asia Pacific and Emerging Markets team’s first product in 1988, sustainable investment has always been an integral part of the team’s investment philosophy and stock-picking process; with all the First State investment strategies striving to integrate environmental, social and governance considerations into every investment decision.  The First State Stewart sustainability strategies take this one step further by focusing on companies which are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate. The first explicit sustainability strategy, the First State Asia Pacific Sustainability Fund was launched in December 2005. The Global Emerging Markets Sustainability Fund was launched in 2009. In addition, the First State Indian Subcontinent Fund has been run with a particular emphasis on sustainable investment since July 2008. In November 2012, First State launched the Worldwide Sustainability strategy applying their investment philosophy in an unconstrained way globally.

Sashi Reddy is lead Portfolio Manager of the First State Indian Subcontinent OEIC.  Before joining First State, Sashi worked at Irevna Research, an outsourced Indian equities research house from 2005 to 2007. As an analyst covering the small and mid-cap European market at Irevna, he was seconded to Credit Suisse First Boston as an associate. Sashi brings with him six years of industry experience, one year of which was gained at First State in a contract role.  Sashi has an engineering degree from the National Institute of Technology, Trichy and an MBA from the Schulich School of Business, York University in Toronto.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Sashi Reddy:  SRI to us simply means investing in companies that have a positive impact on society.  We are looking for companies who look after all stakeholders, not just shareholders. The former, we believe, is quite important to deliver sustainable long term returns.

There are huge developmental challenges in both emerging and developed economies as our ability to use natural resources is far quicker than the planet’s ability to replenish them. We are looking for companies which can promote sustainable development, that is, promote development which is less resource-intensive.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Sashi Reddy:  I wish they did not.  Ideally, there should be no difference.  All shareholders should engage with the companies they invest in.

Sadly, however, there is however a difference. We are aiming to move faster on sustainability issues and invest our clients’ monies in companies which benefit from sustainability, either addressing sustainability headwinds or being well positioned to benefit from any tailwinds.

Coca–Cola, for instance, is one of the best known brands globally but the company’s products face overconsumption headwinds especially in countries like Mexico, driven by a shift to healthier diets. We believe allocating our client’s capital in companies such as Marico, which has a more direct positive impact on health outcomes, makes better investment sense longer term.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in Asian emerging markets to manage?

Sashi Reddy:  In Asia, the majority of the companies are family-owned companies, some of whom are conservative, with sensible long term horizons. For example, our governance criteria led us to remove 80 of the largest 100 companies in India from our investment universe. I suspect it is similar across Asian emerging markets, although, of course, there are country-specific conditions and factors.

Governance is a good indicator of management’s attitudes to the environment and social issues.

Let me give an example:  Building a plant in India takes time not least due to bureaucracy. Companies have to earn the trust of local communities, as they have to operate alongside them for decades. Cutting any corners here, while helpful in the short term, creates significant long term risks. Conservative long term managements realize it is essential to earn their “social license to operate” from these communities.  This is a time-taking process and cultures with shorter horizons tend to falter.

Attitudes towards these issues are different across countries.  For instance, in China it is very top down as the economy is largely controlled by the state.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Asian emerging market companies to analyze?

Sashi Reddy:  There is enough information out there to make informed decisions. For example, we view the prospectus as an excellent source of information.  But, not many investors read them.

On an ongoing basis, we often find that many of the good quality companies have the information, but do not disclose it.  Companies tend to be reluctant to publish such information as they don’t see the regulatory need to do it. Most shareholders have never asked for such information as well. If we continue to ask these questions over a period of time, companies will oblige unless they have something to hide. We are constantly engaging with managements to integrate sustainability reporting with their annual report.

Emerging Markets ESG: In April 2013, a survey conducted by First State Investments posited that stronger mandates and a greater emphasis from asset owners regarding ESG would accelerate its integration by asset managers.  Is this true in Asia / Asian emerging markets?

Sashi Reddy:  Yes.

As investors we must have the right time horizons to believe that sustainability challenges present either long term headwinds or tailwinds for companies.

Investors must earn their right to engage with companies. For managements to take the investment community more seriously, we cannot operate with a six-month horizon!