EMERGING MARKETS: a safe place for SRI ?

During January 2011, the Wall Street Journal's Erin McCarthy wrote an interesting piece entitled Socially Responsible Funds Take on Emerging Markets.

Erin noted there's been an inflow of funds gushing into Emerging Markets, with over $92Bn  in 2010 alone (that's up 11% from the prior year).  This was in sharp contrast to funds in Developed countries such as the U.S. that witnessed over $62Bn in outflows (mostly into bond funds).  (Note: this data is sourced from EPFR Global.)

With all that green flowing into Emerging Markets, it is a foretold conclusion that some of the monies would collect into SRI-based funds.  Recently, MMA Praxis Mutual Funds launched a "socially responsible investment fund."   Chad Horning, its chief investment officer is aiming to screen out the worst companies.  (Hmm, which reminds me of a list we  posted on this website, but that worst list was for shares of Developed countries click here.)  Another fund set-up for SRI is Amana Developing World Fund, which invests according to Islamic principles, or Shariah, according to WSJ's Erin McCarthy.

Well, just by reading about the two funds mentioned above, readers can already ascertain some of the difficulties with Emerging Markets.  Below are specific concerns, etc. that investors should look out for...
  1. Typical SRI principles may not be applied uniformly (several definitions exist in the U.S. alone)
  2. Emerging Markets do not have developed ESG disclosures, or corporate reporting that some Developed countries do.  (France, for example, requires disclosures).   Though, the small market of Estonia, also requires publicly listed companies to disclose ESG data.
  3. Cultural differences make the "S" in ESG quite difficult to get a grasp on, as what may not be accepted in Developed Markets, may be considered normal business in Emerging Markets (for example, Human Rights may not be respected.)
  4. There is a lack of independent, ESG databases that can be relied on.
  5. Lack of consistency and transparency in ESG reporting, as well as financial reporting 
  6. Cultures may interfere with disclosures and analysis (see Egypt comments below)
  7. Local governments may interfere with the due diligence of analysts.
What are "hands on" Asset Managers and Analysts saying....
  • According to Matt Patsky,  who is the CEO of Trillium Asset Management,  in order to perform decent analysis in an Emerging Market, you would not only need an ESG database, but several, so that they can be cross-checked against each other.

  •  Magnus Furugard, of GES Investment Services (Stockholm, Sweden) says that the Social issues are the most difficult to examine.  This is because investors don't understand the local cultures, and are unaware of the local politics going on behind the scenes.

  • Andrus Alber, of NASDAQ OMX Tallinn (Estonia) says that the Environmental issues were difficult for companies to manage several years ago.  However, now it's Governance issues, especially in Central and Eastern Europe. The exception is Estonia (see numbered points above).

  • Geoffrey Williams, of OWW Consulting (Malaysia) also finds Governance issues challenging.  He notes that "what we read in company reports, and even newspapers doesn't always reflect the reality in practice.  Information flows to shareholders tend to be quite sparse."

  • Jay Vontobel of Vietnam Holding Asset Management, finds that transparency and corporate governance pose significant challenges to SRI and financial evaluation. In the former planned economy of Vietnam, the state retains holdings in many companies, entailing a lack of flexibility and dependency on government officials.  He also notes that Environmental issues are a challenge, legislation is enforced selectively.

  • Gaetan Herinckx, of Sustainable Capital, (Mauritius) notes that there is a general lack of transparency irrespective of the ESG dimension.  Therefore, SRI analysis demands significant "hands on" in-site due-diligence.

  • Ashraf Gamal from the Egyptian Institute of Directors, notes there is a fairly high level of corruption that needs to be dealt with.  This is because in some industries, corruption is an acceptable way of getting things done.  Investors also need to be aware of "conflicts of interest."  Thus, they need to evaluate the independence of professional service providers (auditors, accounting firms).  Note these comments were made before the transition of power in Egypt occurred.

  • Jerome Tagger is COO of Principles for Responsible Investment. He believes the Social aspect is difficult to access given the wide potpourri of cultures involved.  However, people (investors) he speaks to say that data disclosures are a key challenge.

  • Peter Mihalyi of University of Pannonia (Hungary) has a different take than the others.  He believes country risk is a big overwhelming issue given the high levels of risk (and debt) in Hungary.
Conclusion:  From the comments above, one can see that Socially Responsible Investing has yet to hit its stride in Emerging economies.  While this writer expected Social and Environmental issues to be key challenges for investors, the comments above more than suggest the key issue is Governance/Transparency.   This can also be interpreted meaning that non-SRI analysis remains challenging in several Emerging economies.

Readers that are interested in SRI Emerging Markets are encouraged to contact Emerging Markets ESG  Emerging Markets ESG is dedicated to the analysis, benchmarking, development and promotion of reporting on environmental, social and governance (ESG) indicators in emerging markets

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