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Socially Responsible Investment &
Emerging Markets
Chetan J. Parikh
Jeetay Investments Pvt Ltd
www.jeetay.com
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Investment rationale for socially responsible investing
1. Evaluating a company’s environmental and social impact in addition to its financial performance provides an additional hedge against risk
2. Socially responsible companies offer long-term value
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Is it reasonable to apply socially responsible investing methodologies from the developed world to emerging markets?
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Global reporting initiative: March 1999 exposure draft. Illustrative application of themes to major dimensions of sustainability.
Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Diversity
An enterprise’s mix and balance of activities and human, ecological and economic resources
Business diversification
Employee diversity, including employment of minorities and disabled people and empowerment of women
Resource use diversity Consumption of non-renewable resourcesConsumption of renewable resources
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Added Value
Increasing of relative worth, utility or importance as a result of enterprise activities
Return of capital employed Shareholder valueEconomic value addedInvestor satisfaction
Intangible value (e.g. good will) Information or knowledge held by employeesEmployee satisfaction
Conversion of waste to usable or salable product Activities to offset negative effects of other activities [e.g. carbon sinks for CO2 emissions)Local impacts such as landscaping
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Productivity
Effectiveness in creating results, benefits, profits or other forms of value
Profit marginsStability of economic imports on communities
Rate of employee turnover Customer retention rateInvolvement in civic activities
Resource efficiencyMaterial efficiency
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Integrity
Adherence to principles and ideals
BriberyPolitical contributionLawsuitsQualified accounts; exception to auditors/verifiers’ statementsInformation disclosure policies and practices
ComplaintsLawsuitsPublic opinionMembership in social responsibility foraInformation disclosure policies and practices
LawsuitsEnvironmental management systemsMembership in environmental responsibility foraInformation disclosure policies and practices
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Health
Soundness and resilience
ProfitabilityDemand of products or servicesSolvency/ liquidityRating by investment agencies
Health of workforce (e.g.. Employee injury rate, lost time days)Healthcare entitlements/benefitsHealth of communityLocal health risk of manufacture or service
Health risk of product or service Consumption of critical natural capitalRemediationContribution to ecological problems or changes (such as climate change contribution)
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Sample themes Sample economic dimensions
Sample social dimensions
Sample environmental dimensions
Development
Evolution, growth, progression
InnovationInvestments or capital expenditures
Employee training and developmentContribution to or impact on local infrastructure or servicesSocially or ethically targeted investments
Investment in environmental technologiesProduct line substitutionEnvironmentally targeted investments
Source: The Coalition for Environmentally Responsible Economies (CERES)
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Are emerging markets limited and lacking transparency?
Emerging markets experience:economic instability weak legal infrastructure weak regulatory enforcement unpredictable government involvement
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“In the UK, elders talked of ‘public censure’ for companies ignoring the code. Can such polite nudging work in India where corporate piracy has been the norm, not the exception?”
- “Face Value” – author, Debashis Basu
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Fredrick Hayek explained why corporations cannot be permitted to define their role in society beyond that permitted by law.
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“So long as the management has the one overriding duty if administering the resources under its control as trustees for the shareholders and for their benefit, its hands are largely tied; and it will have no arbitrary power to benefit from this or that particular interest. But once the management if a big enterprise is regarded as not only entitled but even obliged to consider in its decisions whatever is regarded as the public or social interest, or to support good causes and generally to act for the public benefit, it gains indeed an uncontrollable power - a power which could not long be left in the hands if private managers but would inevitably be made the subject of increasing public control.”
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David Engel found only three permissible corporate activities beyond profit maximization.
obey the law inform the public about the corporation’s
impact on society minimize corporate involvement in politics
- “An approach to Corporate Social Responsibility, Stanford Law Review (1970)
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Would this definition be considered insufficiently rigorous to meet the definition of ‘social responsibility’? Are there varying definitions of social responsibility depending on cultural factors?
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There has been a lack of high profile funds investing in socially responsible companies and limited long-term performance data in emerging markets.
However there is inconclusive interpretation of returns in the short-term in developed markets.
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In 2003, 67% of the 52 screened U.S. funds tracked by SIF earned the highest ratings for performance from Lipper and/or Morningstar.
A Morgan Stanley study found that sustainability leaders in the MSCI World Index financially outperformed sustainability laggards over the past 4 years.
A Wharton School study found that SRI mutual funds underperformed portfolios representing a broader fund universe.
A study of 103 German, US, and UK SRI mutual funds found no significant difference between their returns and those of unscreened funds
Sources: SIF, 2003; www.sri-advisor.com; www.sristudies.org
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There is negligible independent oversight in emerging markets. In India, enormous power rests with a few financial institutions. They have usually acted only in their own interest.
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Is socially responsible investing congruent with long-term value investing?
Not Necessarily
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Key to successful long-term investing
Moats
Management
Margin of safety
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Evaluating management
Compensation Character
Operations
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Compensation
Does management pay itself for performance?
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Character
Were executives given “loans” that were subsequently forgiven?
Do executives get perks paid for by the company that they should really be paying for themselves?
Does management use stock options excessively? Does management use its position to enrich friends and
relatives? How ‘independent’ are independent directors? Is management candid about its mistakes? Is high quality talent being retained?
Thank you
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