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 Andy Gebhardt, Founder and Director, SolAbility, South Korea.
SolAbility is a sustainability service provider based in Korea, providing sustainable management advice to corporate clients and advanced sustainable investment research covering Korea and Pan-Asian equities for institutional investors. Three companies for which SolAbility has designed sustainability strategies and management systems have been identified as most sustainable company globally in their respective industry by the Dow Jones Sustainability Index (DJSI “global super-sector leader”). Andy Gebhardt is the founder and director of SolAbility. Prior to moving to Korea in 2005, he worked as analyst for the DJSI at SAM Research in Zurich and conducted several assignments as a researcher of energy technology and energy market developments for different research institutions. While in his twenties, he was involved in humanitarian relief projects in the Balkans and Central America and served as a project consultant. He holds a Degree in Energy Engineering from the University of Applied Sciences Northwestern Switzerland and a Master’s Degree in in International Development from the Bradford Centre for International Development (UK).
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Andy Gebhardt: There is a certain amount of confusion of what is/differentiates SRI, ESG, RI and the other related terms, and the different terms man different things to different people. My personal definition of sustainable investment would be investment that takes into account long-term management capabilities of companies, both in terms of internal management (internal environmental & social management and in the supply chain) as well as in terms of future vision and sustainable product/service development.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Andy Gebhardt: By definition of sustainable development, SRI or sustainable investment should have a long-term focus. That means that investment decisions should be based on the long-term revenue/profit perspective of a company. This would also imply that stocks picked should be hold for a longer time rather than trying to gain profit on short-term market fluctuations.
In the Korean context today however, the main difference between “mainstream” and “SRI” investment seems to be a slightly different starting/investment universe, while the actual investments are – by and large – based on short-term market gains/losses in both investment strategies.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for companies in South Korea to manage?
Andy Gebhardt: It’s probably no news to anyone that governance culture in the large Korean conglomerates is somewhat different. Most internationally known Korean companies (Samsung, Hyundai, LG, SK, etc.) remain under the absolute control of the heirs of the company founders, who often treat their companies as their personal possession when it comes to control, despite owing only marginal percentage of the actual shares.
A second issue is resource efficiency: as energy was considered a key ingredient for economic development, energy taxes in Korea have been low, supported by regressive electricity tariffs (the higher the consumption, the lower the per-unit electricity price), which has led to low energy efficiency. With increasing global energy costs, this has become a threat to competitiveness. However, energy efficiency is now being addressed rigorously in companies around the country.
A third issue is supply chain management – with increasing outsourcing of manufacturing to China and other Asian economies, managing the supply chain has become a major issue in recent years, as witnessed by a recent report accusing Samsung of using child labor in Chinese factories managed by sub-contractors.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in South Korean companies to analyze?
Andy Gebhardt: The corporate governance issue remains unresolved, and leads to unforeseeable investment risks. (None of the major Korean conglomerates have gone without a major scandal affecting share value in the past 10 years, involving bribery, shady transactions or other illegal business activities between group companies). However, given the lack of alternative investment possibilities, those risks are simply accepted.
Amongst the flood of “green company” slogans and CSR reports, it has become challenging to differentiate between true sustainability leaders (that implement sustainability in their wider strategic decision making and corporate development) and the followers. The amount of available information requires new ESG methodologies to identify outstanding sustainable investment value.
Emerging Markets ESG: What are the three most pressing sustainability issues in South Korea today? Has anything changed during the past decade?
Andy Gebhardt: Korea imports 97% of its energy needs. In light of rising energy scarcity and rising demand from emerging economies, energy efficiency and energy infrastructure decisions is and remains a key issue – that at the same time creates new business opportunities, some of which (intelligent services, batteries, PV) are aggressively pursued by Korean companies.
Korea has seen tremendous and maybe unparalleled development over the past 40 years. Some of this development was due to past availability of cheap labour. A key challenge therefore will be to provide qualified jobs to the segments of the population previously active in manufacturing whose jobs are now being outsourced to China and other Asian economies, and to prevent the income gap from spiraling further.
A third key issue mid-to long-term is presented by demographic changes: Korea has gone from a large-family culture to a one or two child culture within less than 30 years, leading to a potential scarcity of labor in the long-term future, but also to significant social changes and changing individual expectations, career goals and work ethics.
The financial crisis of 2008 has been a turning point in Korea. Following the crises, numerous corporations underwent strategic reviews, leading to momentous change in perception of the business value of sustainability at the top-management level. The value attached on improving sustainable management is an encouraging indicator for sustained development and prosperity in Korea.