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 Dr. Rory Sullivan, Senior Research Fellow, University of Leeds, UK and Strategic Advisor, Ethix SRI Advisors, Sweden.
Dr. Rory Sullivan, Senior Research Fellow, University of Leeds and Strategic Advisor, Ethix SRI Advisors, is an internationally recognised expert on responsible investment. His experience has included seven years in one of the largest asset management companies in the UK focusing on the investment implications of climate change, human rights and development issues, as well as being the investor lead on the Oxfam Better Returns in a Better World project. He has also worked as an adviser on environmental and development issues for international bodies such as EBRD, OECD, World Economic Forum, UNEP, UNDP and the World Bank, and has provided strategy and policy advice on these and related issues to industry and investor networks, national governments and private sector companies. Rory has written seven books and many articles, papers and reports on investment, climate change, human rights and development issues, including Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information? (Greenleaf, 2011).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Dr. Rory Sullivan: The common interpretation of SRI is that it involves taking account of environmental, social and governance issues in investment practice. In the context of emerging markets, this is generally taken as meaning that investors should assess the environmental, social and governance-related risks and opportunities associated with a particular investment to and take action to mitigate the negative and maximize the positive implications of these for the investment.
But, frankly, this is what investors should do anyway; not doing so would simply be reckless. The real test of whether an investment can be considered as ‘socially responsible’ is whether its lead to real improvements in the quality of people’s lives and of the natural environment, over and above the outcomes that would have been achieved anyway? If it doesn’t, then the investment cannot be considered to be ‘socially responsible.’
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Dr. Rory Sullivan: SRI differs from ‘conventional’ investment in three ways: duration, scope, and values. That is, SRI is concerned about the long-term, it is concerned about the wider impacts and implications of the investment decision, and it places the maximization of positive social and environmental outcomes at the heart of the investment activity.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in emerging markets to manage?
Dr. Rory Sullivan: My experience is that companies are most likely to encounter problems when it comes to assessing and managing human rights issues. There are various reasons for this. Perhaps the most significant is that in many emerging markets, human rights are not effectively protected by governments. The consequence is that companies, often through no fault of their own, find themselves in the frontline of controversies around the human rights of local population. This is compounded by the lack of consensus around what is expected of companies when operating in emerging markets. While the work of John Ruggie, the former UN Special Representative on Business and Human Rights has been hugely useful in defining the management systems and processes that companies should have in place, there is limited consensus on the specific performance outcomes that companies should seek to achieve (notwithstanding the hugely important work of the Business Leaders Initiative on Human Rights). The consequence is that far too many discussions around the responsibilities of companies default to highly polarized, and frequently, unhelpful and ill-defined discussions about human rights. The problem for companies is that without clarity around expectations, it is extremely difficult for them to clearly define the limits to their responsibilities.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging market companies to analyze?
Dr. Rory Sullivan: For investors, governance is clearly the critical issue. Within this, there are a variety of issues: how to ensure that shareholders’ (or investors’) interests are properly protected, how to ensure that the company is run in an ethical manner and does not engage in illegal or unethical business practices, and how to ensure that risks – in particular those relating to social and environmental impacts – are properly managed.
The reason governance is so challenging is that it requires investors to proactively engage with companies, to monitor performance and to take action when problems emerge. For investors raised in the more laissez faire world of western investment markets (where regulation and other investors can often be relied on to take up the ownership slack), this represents a major change in emphasis and approach.
Emerging Markets ESG: Why should institutional investors take responsible investment seriously in emerging markets?
Dr. Rory Sullivan: There are two reasons. First, at the level of individual investments (in a stock, a project, a bond issue, etc.), investing in emerging markets requires investors to understand and proactively manage the risks associated with their investments. A lack of focus on ESG issues – given that these issues are frequently among the most material risks associated with emerging market investments – is almost a guaranteed way of losing money.
Second is the ‘social licence to operate and invest’. Western investors see that emerging markets will provide much of the growth and opportunity that they need to pay the pensions of current and future generations. If, however, foreign capital is not welcomed by emerging markets and/or there are significant constraints placed on investors’ ability to invest and, equally importantly, divest from investments in these markets, foreign investors’ ability to generate returns will be significantly compromised. The only way Western investors can ensure they are welcomed over the short, medium and long term is to demonstrate that foreign investment (whether through equity markets or through direct investment in projects) provides long-term sustained and sustainable social and environmental benefits and makes a real contribution to improving people’s lives.
That is, responsible investment is no longer something that is done after the core objective of making money has been delivered. Rather responsible investment must be at the heart of investment practice.