ESG INVESTMENT IMPLICATIONS IN EMERGING MARKETS, AND OLYMPIC-SIZE CORRUPTION

Weekly Viewpoints on Sustainable Investment 

In this week's note some reflections from a global webinar on emerging markets, looking across to Brazil and ahead to PRI in Person in Cape Town. 

Low altitude sky view of Cape Town harbour and city centre toward Table Mountain, 9 July 2013. 
PHOTOCREDIT: Jean Tresfon, by permission. http://www.flickr.com/photos/jtresfon/

EMERGING RULES OF INVESTMENT     

The rules of investment are different in frontier and emerging markets. Even before the start of the 100th edition of the Tour de France 13 stages ago, I had taken to explaining the gaps between regulations and realities in investment by using the example of cyclist Lance Armstrong (first "I never tested positive" for a decade, then that tear-jerker Oprah Winfrey half-apology apology). Investment, and investment analysis, in frontier and emerging markets happens across borders of regulations, guidelines and laws. The SinCo Investment Philosophy is that there is ESG in every investment decision in the global professional investment management industry, sized at $62 trillion by BCG. Sustainable investment is proactive approach to advanced investment management through integrating ESG factors. It is a broad term, and details matter. None more so than when investing in frontier and emerging markets, the subject of Thursday's global webinar hosted by MSCI ESG "ESG Investment Implications for Emerging Markets". My view remains that "emerging markets" tag is a sweeping simplification, useful in the 1980s when coined by the IFC, redundant in this decade. China has an orbital manned space program, India launched a missile from a submarine platform. Emerging?! We have a competitive economic marketplace in which "[c]hanging trade patterns show, the BRICs and the N11 becoming bigger should make us all wealthier in aggregate...the view of the BRIC countries becoming bigger than the US before 2015, and bigger than the G7 by 2035..." according to Jim O'Neill in his last note "The World Still Needs Better Economic BRICs" in April 2013.

My presentation to the global webinar covered two major themes (slidedeck here http://slidesha.re/13DiVpC):

A. Beyond BRICS countries, towards frontier markets and frontiers of ESG:  

1. Defining your universe of opportunity, and your portfolio entry points. 
2. Understanding the license to operate of professional investors and their portfolio companies. 
3. The scope of rules and regulations is smaller than global reputations. 
4. Relationships are critical in markets with more forms of alternative ownership models and new offerings.

B.  PRI in Person outlook, the enigmatic Africa opportunity: 

1. PRIiP2013 has an important footprint effect for PRI, leveraging strategic opportunity in Africa.
2. Introduces opportunities in fragments, the frustrating search for scale. 
3. The asset allocation decision and sector exposure may be more important than the geographic universe opportunity in Africa. 
4. Will the PRI legacy be more than FIFA FWC 2010?

ESG may act as a proxy for advanced due diligence or a marker for absent rules in the marketplace. Food and beverage products with a good reputation are critical to food and beverages companies, as well as their investors, regulators, consumers, and politicians. Food is politics, never more so than when analysis by FAO and OECD predicts that cheap food is history. The Access to Nutrition Index project has illustrated to me that making ESG happen in growth markets will reveal limits to ESG data coverage, national differences in reporting, culture differences, language and jargon barriers, and opportunities to re-interpret ESG concepts. 

PRI ANNUAL EVENT COMES TO AFRICA

Africa introduces opportunities in fragments, and may frustrate businesses and investors seeking for returns to scale, because the continent is so diverse, and so large. For investors seeking exposure to the Africa growth story (not the McKinsey-esque hype, the other story based in reality), I suggest exploring the asset allocation decision and sector exposure. Choosing the right sectors, and which asset classes to invest through may be more important than the geographic universe opportunity to be had in covering Africa. At SinCo we encourage thinking that mirrors the business being done in emerging markets, following anchor industries with multi-stakholder high-impact, high-visibility sustainability profiles, for example, investing in frontier markets in the mining sector faces issues of resource scarcity, above-ground risks, lesser regulated jurisdictions, community pushback, transparency, the "Bumi syndrome" where historical, relational business collides with expectations of corporate governance. So investing in this theme will track a material economic and sustainability trend. The Africa growth story is overplayed. This is demonstrated plainly by the latest UNCTAD report describing intra-Africa trade barriers, often experienced by overland travelers and trucks by hours-long border crossings. 

And so the annual event machine that is the PRI in Person event is cranking up for the conference 1-2 October being hosted in Africa for the first time. Like the FIFA Football World Cup 2010, it will be in Africa's largest economy, South Africa. Africa has been represented in the Principles for Responsible Investment (PRI) from the start by Africa's largest sovereign wealth pension fund, the US$131 billion AuM Government Employees Pension Fund of South Africa. The PRI South Africa network was one of the first country networks, illustrating the take up by investment managers and services providers, asset owners have been largely absent. John Oliphant, Head: Investments & Actuarial, has lobbied hard to get the annual show onto the continent. I was at a particularly frank meeting of stakeholders in 2010 when investment professional colleagues were left staring at their notepads as questions about making responsible investment happen in Africa were hanging in the air over the boardroom table at GEPF headquarters in Tshwane. 

The PRIiP2013 agenda has taken shape for the 2 days (http://www.unpri.org/events/pri-in-person-cape-town/). I am pleased that private equity is receiving specific attention, albeit outside the formal program on 4 October and have supported the PRI team in London with designing the program, and encouraged the co-work of private equity associations AVCA and SAVCA. PRI is being hosted in a city, within a country and on a continent that has a long history and a demanding current reality. PRIiP2013 delegates do well to scale their rhetoric to the realities. Impact, longevity and equity matter: global asset management is $63 trillion, only $450 billion in emerging markets. Will PRIiP2013 leave a better legacy than FWC2010? FIFA made a tax-free $1 billion in 2010, forced the building of the beautiful white elephant stadium in Greenpoint, Cape Town, and stoked a corruption wave in South Africa that saw a whistleblower assassinated and that is today still playing out with construction companies "facing a firing squad" according to the CEO OF Murray & Roberts (OTCMKTS:MURZY). Corruption is a two-way deal. Sustainable investment aims to come down hard on corruption in business, and most ESG dashboards have pretty sophisticated approaches to filtering governance failures. The details of how the market was manipulated needs to be further understood. Meanwhile construction companies governance scores in South Africa will have tanked. 

CONSTRUCTIONS FIRMS AND WORLD CUPS/OLYMPICS: IT'S COMPLICATED

Based on the largest street protests in a generation in fellow BRICS major Brazil, it looks like the role of construction companies, and their billion dollar contracts, will also play out. I am looking forward to the FIFA FWC2014 in Brazil (especially following THAT 3-0 hammering of Spain last week), and the Rio Olympics 2016. In the withering glare of the business media this week has been billionaire Cesar Mata Pires (Bloomberg: "World Cup Billionaire Stirs Brazil Protests Over Stadiums"). The 90% shareholder of construction firm OAS has benefited hugely from infrastructure projects, and has leveraged financing from Brazil's BNDES development financing bank. OAS has low income housing deals with Brazil's 3 largest pension funds which have an asset base 2x Luxembourg's GDP in 2012. BNDES saw its loans double since 2008 to 156 billion reais last year, twice the total lending of the World Bank. PRI Board member, PREVI, is the largest in Brazil, and is based in Rio de Janeiro. Apparently, a street protester's placard allegedly included "The $ for Education Went to OAS". Ouch! No doubt @BW journalist @BlakeSchmidt is off Mr Pires's scoop shortlist... Bloomberg reports that with the help of subsidized loans from Brazil’s state development bank, closely held OAS SA had revenue of $3.4 billion last year. The OAS head of investor relations Barreto described protesters’ "targeting of OAS is “ignorant” and “simplistic,” and that the company obeys the law...It’s the only existing business model in Brazil." In future posts I will offer some comments on alternative ownership structures and the role of the national governments in frontier markets in financing growth.

MARKETPLACE REPORT ON ESG IN AFRICA INCOMING AUGUST 2013

And finally, a quick update on the marathon project to roll out the AfricaSIF.org 2012 Trends Report (http://www.africasif.org/trends-2012.php). Along with the all-volunteer team of practitioners and graduate students across Africa, I have been working on nailing down the data, analysis and commentary for this first-ever report. The excitement in the report is this new analysis from Africa for Africa and the world. The team is now targeting the IMN Africa Cup of Investment Management 27-29 August for the start of the launch roadshow. This first-ever reporting of professionally managed assets investing in Africa with ESG in some way included in the process. Collaborative project includes GEPF, MSCI, Bloomberg, Investec Asset Management, SinCo, RisCura, Mergence Investment Managers, OMIGSA, and Frost and Sullivan. The survey estimates that the level of sustainable investment in Africa is high with about $233 billion AuM or 63.4% of total AuM of Africa investments is self-reported to be managed according to sustainable investment principles. This implies the African (competitive) market is material for sustainable investment firms, but also pretty scrappy to command market share. Research is costly, especially north of South Africa where reporting is thinner. This helps explain why all major ESG research shops now have decent large firm coverage in South Africa, and why MSCI ESG just hired their first Africa-based analyst starting end August 2013 in Cape Town. Good timing. Chris Froome, current race leader and likely the first Africa-born winner of Le Tour, may be lying on his couch wearing a yellow jersey by the end of July.

Do good work on sustainable investment that matters.

Graham Sinclair
@esgarchitect

Principal
SinCo - Sustainable Investment Consulting
www.sincosinco.com
@SinCoESG

Based on my work, experience and interactions, all views and opinions expressed are those of the author and do not reflect the named individuals, institutions or SinCo, it's clients or services providers. No mention suggests endorsement. This commentary does not constitute investment advise. Issued by SinCo to professional investors and stakeholders for information only and its accuracy/completeness is not guaranteed. All opinions may change without notice and may differ to opinions/recommendations expressed by other business areas of SinCo. SinCo may maintain positions and trade in collective investment instruments referred to. Unless stated otherwise, this is not a personal recommendation, offer or solicitation to buy/sell and any prices/quotations are indicative only. SinCo may provide sustainable investment architecture and other services to, and/or its employees may be directors of, companies referred to. To the extent permitted by law, SinCo does not accept any liability arising from the use of this communication.

© SinCo 2013.  All rights reserved. Intended for recipient only and not for further distribution without the consent of SinCo. SinCo reserves the right to retain all messages. Messages are protected and accessed only in legally justified cases.


UPDATED 15 July 2013: Text edits, paragraphing, hyperlinks.

Emerging Markets…Brutal BRICs?! II/II

In the week that began with Citi [C] becoming the US government's latest shareholding, JPMorganChase [JPM] was pitching their core competency as a lender, and Goldman Sachs [GS] was looking to stretch their sustainability advantage branding their research and investment products. JPM was busy offering a full page advertisement in WSJ Eastern edition A5 Tues 25 Nov pitching to the WSJ readership on their commitment to lending [“Our Business Is Lending. And That’s Exactly What We’re Doing”], including “in a responsible way”. Yes, I can only imagine what my mate who taught me how to build a BS filter for company ESG claims, the KLD research director in Boston, will say about that one!

Goldman Sachs was taking the front foot in the FT Mon p.3 with the first above-the-line hardcopy advertisement I have seen for GS Sustain, a fair advertising budget commitment to go above-the-line. Of course GS hedged bets by burying the ESG lead in the body, the sub-title “innovative thinking finds innovative companies”, and one has to mine the paragraph further for “a unique global equity strategy that brings together ESG (environmental, social and governance) criteria, broad industry analysis and return on capital to identify long term investment opportunities”. But GS now fronts their homepage with GS Sustain. Clearly someone is taking a big bet, and perhaps with freefall markets, a good time to try something completely different.

GS Sustain has a colourful history. It's strong underpin is from the GS sell-side in London via the work dating back to 2003 of Anthony Ling in the Energy Equity Research team, and then taken forward by Sarah Forrest, Marc Fox and colleagues. Sarah is now an Executive Director for Global Investment Research. After finally establishing a coordinated framework in early 2007 – GS Sustain – which launched to plaudits from the usual UN Global Compact types and affiliates in Geneva last July, the GS Sustain brand has been slowly building. Like IBM, no presenter looks dumb when quoting GS – a false security to be sure – but expedient for now. Indeed, in my MBA865 seminar at Kenan-Flagler Business School, Sustainability in Investment Strategy at Chapel Hill last week, one of the most informed students referred to “it’s Goldman Sachs!” as the GS halo in the ESG space proves to light the way for less skeptical inquiry of how sustainability plays in. Clearly GS benefits from being one of the two last i-banks standing, [mostly!], and may push for competitive advantage on sustainability matters in the FT, the print daily which positions itself in US as more global than the WSJ or NYT Business Day as a major business daily. Companies, as they do with any positive third party assessment, but especially when it is a major i-Bank brand, are only to happy to tout their standing in any competitive assessment, such as BG Group [LON: BG] a natural gas company.

I was first alerted to the new GS Asset Management product built off the GS sell-side’s GS Sustain framework in Manhattan at the Sustainable Investing 2008, People. Plant. Profit. on September 23-24th, 2008 at The Harmonie Club, New York City. At that time the product was available offshore only, but now institutional US clients may access it. The conference was hosted by Financial Research Associates, LLC for the first time, as a new conference publisher entering the sustainability space, with assistance from SIF.

In the next two weeks I will be having a more solid look at GS Sustain GSAM product as forward planning for when it has run a year at least and we may start recommending the strategy from an informed understanding to the benefit of asset owners and multi-managers. I like that GS Sustain is in the game, for sure, but a close examination of some of the underlying criteria makes me cautious based on my past experience of ratings that are built on "box checking". The framework looks good, but underlying data, and assumptions like memberships of an initiative or international organization sending signals about sustainability, may be sub-optimal. I am cautiously positive, and our recommendation at Sinclair & Company to investors is to observe closely, and stress-test the ideas before becoming convinced. I have not reviewed the strategy in detail since hearing about it in late Sept, partly because the most impressive aspect of the Sustainable Investing 2008 event had me moving to other thinking. Other than Tim Smith’s usual excellent chairmanship [when not chairing SIF, he is in Boston as Senior Vice President at Walden Asset Management], was the compelling speech by Joe Keefe CEO of PAX over lunch, one of the best expositions on where ESG/sustainability investment is in 2008, and where it may go, an extract of which is here.

And of games, well, it just would not be right to cover emerging markets and London in the same story, and fail to mention Saturday's smashing game the Springboks played against England which CNN titled "Springboks Thrash England at Twickenham". Rugby, like life, rewards grit as well as grace, with patience a coaching watchword lately. So comprehensive, the Brits found time to boo their team. Yikes! The tackles, the tenacity and the touch South Africa showed against England in their backyard, racking up the Roses’ biggest ever loss at home, was a fresh reminder of the entrepreneurial and rugged nature of the boys from the bottom end of Africa.

Sarah is an Aussie, so she would have enjoyed it, and the headliner from The Australian "Springboks Outclass England at Twickenham". The boys from Goldman are credited with the BRIC moniker coined the term ‘BRIC’ in our Global Economics Paper, ‘Building Better Global Economic BRICs’, published on November 30, 2001. Maybe they had seen Bakkies [“bricks”] Botha make a tackle sometime before, like the try-saving one he made on Saturday? [sidenote: should every rugby player hope for a wikipaedia entry?!]. Yes, I know, South Africa has the ability to play sublimely one week [has Australia recovered from 50-odd thwack at Ellis Park, their biggest ever Test loss?] to the slack - only one Tri-Nations title in all these years. But as I pitched at the Paris UN PRI Board meeting in Nov 2007 - to the sullen looks from the Englishman directly after Springboks won in Paris [and a smile from the Frenchmen] - nice to see EM on top. A small smile for EM slips out when running through the scoreboard from Saturday: Emerging Markets 42 vs. Developed Markets 6.

The England coach called it “brutal” and “a lesson”. Pretty much sums up the financial meltdown for EM and the rest of the world too, and the bleak '09 outlook. Enough said.

SRIX.GS

Emerging Markets…Brutal?! Not For Sissies! I/II

It has been a rough spring in emerging markets in the South [this photo is from April, obviously]. The emerging markets, as simplified and represented by the BRICS moniker [Brazil, Russia, India, China, South Korea and South Africa], have been bounced out the back of the financial services meltdown wagon. The benchmark indices catch you up on the story quickly, and the forex cross-rates quickly offer the impact - Brazilian ranches, Russian dachas or South African wine estates are cheap right now for payers in USD! Yes, as a fixed income manager mate in Cape Town will attest, this creates a serious challenge for his vacation strategy – which weakened forex rate best matches the exotic destination he would like to visit in January?!

Back in February, Goldman Sachs BRICS team spoke of the de-coupling hope…

“…expect GDP growth in the BRICs to be lower this year than last, the structural changes in these economies-and indeed in the world economy-are likely to make the impact of the global slowdown less severe than in the past…one of the key underpinnings of the BRICs' strength: capital flows”

BRIC is the original acronym coined by the GS EM team in NYC, although BRICS is my preferred acronym, and ChIndia the population-weighted current favourite on CNBC. And whether local or foreign, how tough the investment forecasting game is may be illustrated by reflecting on conclusions like…

“Overall, the deterioration in capital flows that we anticipate this year is manageable, and we remain bullish on the BRICs currencies. We expect appreciation of 8% against the USD in China, 4% against the USD/EUR basket in Russia, and 5% against the USD in India. In Brazil, we think the Real could strengthen over the next three months, but it is likely to weaken later in the year.”

The personal finance regulars in WSJ Tues covered the sad EM tale with their “SmartMoney” screens, from being up 50% p.a. in China in ‘06 and Brazil in ‘07, now down about the same magnitude in ‘08, with the Fidelity Latin America fund down -65.6% YTD @ 20 Nov. Yikes! No wonder Fidelity is letting go staff in BOS to trim expenses. Interesting as always to note the pricing – of the no-load funds, the passive tracking option from Vanguard [Vanguard Emerging Markets Stock VEIEX] proves to be cheapest as always, with 40bps annual fee. And like Wal-Mart soaring in these tough depression days as consumers know where to purchase lots of cheap stuff, maybe Vanguard will gather assets even as the regular 401k contributions have to go somewhere. But retirement advisors, a growing advisory service category according to FRC, will need to be longer-term orientated to recommend emerging markets to US clients in 2008. Like Africa, EM is not for sissies! Donald Hanna, MD and Global Head of Emerging Markets Economic & Market Analysis at CITI in New York, offered a bleak look at where EM may be for ‘09 in a presentation in BOS last Thurs. His take on Brazil and South Africa seemed fair...hard times ahead.

Standard Chartered, a bank and a solid emerging markets play based on their strong network in Middle East and Africa, is raising around USD3 bn through a rights issue and just hosted an Investor Trip to its banking operations in India, Abu Dhabi and Dubai from 17 to 20 November 2008. Standard Chartered has a network of over 1,750 branches and outlets in more than 70 countries across the Asia Pacific Region, South Asia, the Middle East, Africa, Europe and the Americas and employees about 75,000 employees from 115 nationalities. Their branding tied to marathon running and cricket hints at their EM exposure. Although without an in-house money manager [I pitched them on joining the PRI in EM project back in Dec 07], nor with direct exposure to toxic US mortgage assets or developed markets financial services, the tough times ahead imply the need for more capital on hand. STAN has some good programmes in EM, as the programme head Mariannne Mwaniki covered last July at for the Global Compact 4th annual Communication on Progress (COP) workshop at the Palais des Nations in Geneva.

Many EM banks did not have direct exposure to sub-prime. But similar to our experience in the South African market, where banks and money managers were prevented from reckless exposure by capital restrictions allowing only 15% offshore investment and hence no major exposure to the developed markets contagion, the resulting flight from risk – perceived or real – has smacked the forex rates and JSE as investors pulled back cash from every accessible liquid markets. At STAN I like some of the work done to play in local communities, for which STAN has won acclaim. STAN have used the IFC Equator Principles guidelines on STAN project finance in developing countries since their inception and adopted the revised Equator Principles 2 (EP2) in June 2006. I think EP2 is solid, but I know NGOs like Banktrack.org have their doubts, and I look forward to research to check in on progress on the ground from a former Boston College Center for Corporate Citizenship colleague now at HKS.

In the STAN [Standard Chartered PLC, LON:STAN] core banking business, the opportunity “at the bottom of the pyramid” makes sense: improving access to sustainable financial services plays an important role in empowering people, both socially and economically, and grows the STAN client base. In Q1 '08 STAN’s Robert Tacon was elected to head UNEP FI, the UNEP/financial sector initiative that organizes conferences and publishes pamphlet [see basic PPT from Seoul July '08 here]. It was a pity when he left in later this year, although I am not sure really what happened there… STAN’s above-the-line campaign, including the FT US print on p.8 of Mon 24 Nov US edition, makes clever connection to their business + community approach with a board room morphing into a well. Solid brand positioning is their reward for a clear marketing message.

STAN is not in Eastern Europe, Latin America, nor the Far East. When we last spoke in his role in sustainability at STAN, Rob's view was that it was:

• Look at what organization sets itself as objective, for example, is environmental and social factors on the agenda?
  
• And if it is, then how is it implemented?
  

His opinion was that companies that take into account ESG will do better. The aim of training is to show why ESG is important, as a long run issue, while in the short term is about reputation. But the benefits to organization need time to manifest itself, it also depends who they are investing for. In EM, he confirmed, it is very hard to convince people, far more difficult to crack sustainability in many respects.

At least STAN has not copied Barclays which has basically shattered investor confidence by rushing to the “Medici” in the Middle East for cash, apparently GBP 7bn [USD 11bn], rather than UK government money with strings. STAN is tapping existing shareholders first. Barclays, which itself bumped up EM exposure by taking a controlling interest in ABSA, one of the big four in South Africa, managed to upset all shareholders with their plan. But being stuck up a creek without a paddle, the investors apparently agreed Mon to let Barclays proceed, knowing that the whole Board is up for a vote next April. Do not be surprised when the door swings the other way at the first next opportunity. George Dallas, the director of corporate governance at F&C Asset Management [and former head of S&P’s CG effort before that was frittered away so needlessly like other ratings agencies], was piqued on Mon. F&C had “reluctantly” voted for the capital raising, but George was quoted as saying "We think that this amounts to a clear and egregious abuse of pre-emption rights. We object that the consequences of voting against this particular transaction would make a bad situation worse". F&C sees "environmental, social and governance [ESG] issues as fundamental drivers of long-term corporate performance, a principle that is central to F&C’s philosophy as an asset manager", and sell their responsible engagement overlay [REO] service.

The Barclays meeting was a fun example of live capitalism right up there with Gordon Gecko’s Wall St address. Shareholders at the 200-strong gathering were still asking questions after 2 hours when Marcus Agius, the bank's chairman, closed the meeting and one shareholder was apparently checked by security guards as he approached the stage. Chairman of Barclays? It too is not for sissies!
SRIX.GS

Air conditioners in Singapore, drunken Tree Shrews in Malaysia

The best invention ever? The air conditioner. My Singaporean friend smiled as he offered this declaration by a Singaporean statesman on my first visit to Singapore and Malaysia this week. Choon is a good man, works in Pharma in SE Asia, sometime rugby player and U of Michigan Ross School MBA alum. I was invited to Malaysia to cover my EM work for CSR and SRI experts at The International Corporate Social Responsibility Conference 2008 jointly organised by the EUMCCI, OWW Consulting and RUSS Consulting, 29th-31st July in a feature presentation on Responsible Investment in Emerging Markets. The region must be one of Carrier or LG or Dakine’s best sales areas. I expect few expats from cooler northern climates in the financial district’s highrises would last long over their XLS spreadsheets without a steady 72F/19C! But what of the climate impact? I’m still waiting on word of how many units are sold without CFCs, and like any competitive and emerging society, I suppose many may be serviced by solo entrepreneurs in small shops doing the best they can, with or without ISO certifications. The climate impact of the air conditioner business post Montreal Protocol, from manufacturing to consumption patterns, maybe worth a paper from my old mate at UNEP working in the Global Environmental Fund.

Walking the streets of SIA and KL has added colour and texture to my understanding of the SE Asia region beyond three letter airport acronyms. Singapore has always been pitched as the goto for investment in the region, and Malaysia has been interesting for me ever since the massive investments in post-apartheid South Africa in 1994/5. It has the similarities with affirmative action and economic empowerment and the tied destiny in the 1997 Asian flu that whacked the South African rand as traders rushed to quit any EM exposure and the ZAR was so liquid [regularly in the top ten most traded currency]. SE Asia is understandably complex, and research rewards the curious, but one needs the street-skills typical of EM. How to explain the site of a bay of waiting cargo ships, the mixed low and high rise properties, curry for breakfast, white bean hot drink, wakeboard center open until 11pm on Saturday night, and dainty bakery items my mum would be proud of baking [I was reprimanded for taking a photo - since when did baked goods become so competitive?!]?

One needs to be on the ground in SE Asia to properly assess performance, especially for understanding environmental, social and governance [the ESG in sectors report is a good illustration Taking Stock — Adding Sustainability Variables to Asian Sectoral Analysis]. The usual pitches by the hotel and the airport to being green were in evidence. The “onsite” argument view was confirmed in conversation with a respected colleague and expert in the region, a former i-bank analyst heading ASrIA. The data is there, what is and is not being done. But one needs to dig for it [the blunt tools of questionnaire and engagement letter are ignored], and the data or its information is not necessarily well-organized. Covering ESG performance in SA Asia may benefit those with the raw data and local knowledge to analyze it. The information asymmetry benefits locally based players in the ESG space, like Fortis, Aberdeen and Lazard. As a former HSBC guy turned business journalist at Channel 7 explained, sharing a story of how his team, in trying to sort lending exposure post the 1997-meltdown, posted his own people to stake out a factory for a couple of days to see how it was really doing, counting movements of widgets to assess inventory, as opposed to the smiling handshakes of the planned visit which hid the real activity driving the factory cashflows.

The International Corporate Social Responsibility Conference 2008 was hosted at Hilton Kuala Lumpur with its four storey window overlooking twisting highway and lush treescapes a few kilometres from the city center of the Lake Gardens. Day One was CSR focused, Day Two on RI, with Day 3 trying to square the circle with the WBCSD workshop. I was most interested in understanding what was actually being done on the ground by local firms. Geoff Williams at OWW Consulting and other local partners have done good work presenting this conference with CSR and SRI days back-to-back, with the WBCSD workshop tomorrow hopefully putting investors, corporate CSR and company development people in the same room. This is another stop in the project to assess the presentation of the sustainability proposition by companies to investors. I met Geoff when I was leading the PRI in Emerging Markets Project at UNEP FI, where Geoff was a positive in building momentum in the region [expect more on the PRI in EM project in future posts]. Geoff, myself and two academics from the local university covering sustainability, USM, will be moving forward on a mapping survey on RI later this year, building on my work with the similar mapping in SA last year – we’ll be keeping lead author in SA, Neil Eccles at UNISA Centre for Corporate Citizenship, looped. I prefer to work collaboratively. Old PRI colleagues at NZ Super amongst others will be supporting the survey. Universiti Sains Malaysia [USM] is positioning itself as the leading sustainability university in Malaysia (in Asian fashion, it has its own USM song). The survey will cover attitudes to RI in Thailand, Korea, Singapore and Malaysia from asset owners, investment managers and service providers. While not groundbreaking, if we build with the appropriate rigour, it may form the basis for a decent view on the state of play, comparison and contrast to the South African State of Responsible Investment study in 2007, and I will look to replicate it in Latin America and Eastern Europe in 2009.

My connecting WBCSD and OWW was important to increase the EM exposure for the WBCSD Business Theme valuation project by getting to Malaysia, and closing the gap between corporate and investor perspectives. Ten CEOs were expected for the workshop on Thursday, and a representative sample of investors [I will cover the project in more detail in Q4 2008]. The WBCSD project will explicitly cover the perspective of multinational companies, local operations of MNCs, as well as local EM country champions. I look forward to the South Africa event at the JSE in November. As with any of these initiatives that I deal with across the sustainability theme – and there are too many of them – I continue to make the case for real, on-the-ground input and activity from an EM perspective.

In my presentation on Responsible Investment in Emerging Markets, by show of hands, there were just five investment professionals in the hall. Most of the 250 delegates were corporate CSR, NGO, academic or public policy people, except for the likes of Anne-Maree O’Connor from NZ Superannuation Fund, Colin Melvin, CEO of Hermes Asset Management (UK) which manages the £35 billion British Telecom Pension Fund, Kris Douma, Head of Responsible Investment Support & Active Ownership at Netherlands based Mn-Services [we met at the Institutional Investor event in Amsterdam in March], which manages €65 billion and Alexis Krajeski, Governance & Sustainable Investment expert, F&C Investments, (UK) which invests more than £100 billion in Socially Responsible Investments [now moved from Boston to London]. YK Park, project Director at ASrIA, covered the Carbon Disclosure Project [CDP] work – ASrIA acts as regional partner for CDP, for example the 2007 CDP5 report. ASrIA has played a key role in opening doors for investors from outside the region. I was hoping YK would offer more information on how the CDP data is being used by investors and CDP members. Understanding the investor impact – and increased use of CDP data – must be measured for a sense of CDP’s impact, a project I have motivated CDP to move on globally in 2008/9.

To hook my insights on EM and ESG in “Responsible Investment: the experience in emerging markets“, I used a little fact I picked up from the BBC Tuesday night to act as metaphor for my speech, see “Malaysian tree-shrew is heavyweight boozer” BBC 29 July 2008. The connection was to the fact that scientists had only just discovered some rather unique behaviour of the small forest creature, how they measured behaviour, and how tracking it over time gives us metrics on how it thrives, including whther it will still be around in 2012.

A tiny tree-shrew that lives on alcoholic nectar could - pound for pound - drink the average human under the table – Proceedings of the National Academy of Sciences . Malaysia's pen-tailed tree-shrew waits until nightfall to binge on fermented nectar from the bertam palm. Insights into how humans' alcohol tolerance first evolved.

The photo was used to reflect 3 messages on “Responsible Investment: the experience in emerging markets“: context, facts, and metrics. My view is that, to understand where RI is and where it may go through 2012, one must appreciate firstly, the socio-economic context of each country [attitudes toward sustainability and ranking of ESG factors will vary], secondly, facts are important and data is available but may need better discovery with better analysis in that cultural context, and finally, the importance of measuring where RI in EM is going, including understanding the appropriate metrics over time per region or country. The message fits the intersection of sustainability and investment where I work. While outside the geographic coverage [Brazil and UK] of the Natural Value Initiative on biodiversity headed by Annelisa Grigg and my former UNEP FI colleague Susan Steinhagen, I think the shrew fits neatly into the fundamental question: how may investors better quantify the biodiversity value of ecosystems? How much is the scientific discovery of this behaviour worth? How much is each shrew worth?

The audience was typically Malaysian (or so my hosts tell me): in the Q&A session – for the first time ever in my public speaking career - no questions! In a region where culture dictates no losing face and reticence amongst strangers, at least in general session, 250 polite people stared back at me. I smiled. This is what you learn when you fly halfway around the world…

Investment as Usual is Broken [Part 2 of 3]: who is doing the math?

Further thoughts from comments I prepared for “Investment as Usual,” for the launch of the Survey of Responsible Investment in South Africa, 2 October 2007 at Johannesburg Securities Exchange, Sandown, South Africa.

Key components of the investment value chain are addressing the breaks, however slowly and tentatively. Indeed, as far back as 2004, Morgan Stanley equity research stated “understanding corporate governance is critical to investing in telecom”, but evidence of impact on decision-making is scant.

In generating investment ideas, the Enhanced Analytics Initiative [EAI] is designed to use the ordinary business of the brightest investment minds who offer best investment research ideas, but explicitly including ESG factors. EAI is a consortium of buy-side funds [investment managers] allocating commissions to encourage ESG research. EAI, including BNP Paribas, the Universities Superannuation Scheme, Investec and Hermes, have agreed to spend 5% of brokerage fees with firms that focus on ESG indicators. The EAI has over thirty representative investors with just under US$4 trillion asset under management [AUM].

The EAI next meeting is 29 Jan in London, hosted by Investec, the mid-size investment manager that I watched grow during my retirement fund consulting days in Durban and Johannesburg thru the 1990's. In my view their South African roots mean they understand the gritty reality of sustainable development and balancing ESG and investment on any given Monday. The sustainability reporting itself has moved a long way up the lifecycle, to a point where no separate Investec CSR report is issued. The EAI six-monthly cycle is up, and an update to the assessment of the best sell-side research should be forthcoming on the website soon.

A pressing question from the latest iteration of the Carbon Disclosure Project [CDP] is: with all the carbon information disclosed, what are investors doing with it? 2007 saw the fifth iteration of the Carbon Disclosure Project Fifth [CDP5], with information on corporate carbon footprints supported by 284 signatory investors representing $41 trillion of assets under management, demonstrating a significant uplift from 2002 (35 investors representing $4.5 trillion). This largest collaborative investor engagement includes blue-chip institutions across all continents including HSBC, JP Morgan Chase, Bank of America, Merrill Lynch, Goldman Sachs, AIG, State Street, Allianz, Credit Suisse, Munich Re, Mitsubishi UFJ, Mitsui Sumitomo, AMP Capital, Swiss Re, Rabobank, ABP, CalPERS, Hermes.

But a question with seldom a direct answer is: but what are investors doing with the information? My first hand experience with shops in Manhattan, Boston, London, Geneve and elsewhere is: not much. A simple question I put to my MBAs at Kenan-Flagler is - at what price are analysts that cover Southern Company [SO] or Duke Energy [DUK] factoring in carbon emissions in their valuations today? Browse their investors page, and keep the coffee in the travel mug, it'll probably be getting cold.

With electric utilities having huge capital costs for new projects or development necessitating decades long investment horizons, it is unclear currently how investment analysts deal with the material impact of CO2 emissions and costs of green house gas emissions. Are SO or DUK even reporting to their shareholders on their green house gas emissions?

Investment as Usual is Broken [Part 1 of 3]: Valuing ESG factors in equity analysis

Investment as usual is broken. The emergence of environmental, social and governance [ESG] factors in the twenty-first century has challenged the core of business thinking and strategy. Corporations are changing, sustainability has risen to the level of the C-suite, P&G recently appointed their first “Corporate Sustainability Officer”. But the “Chief Sustainability Investment Officer” is much further off. WSJ covers this amongst other "title inflation" items in Dec

Enhancing current investment analysis by integrating material ESG factors will offer better pricing of future risks and opportunities.

Global financial stock now stands at US$140 trillion and growing, according to McKinsey, 2007 based on the latest 2006 data. The value of total global financial assets—including equities, government and corporate debt securities, and bank deposits—expanded to US$140 trillion by the end of 2005, an increase of $7 trillion from a year earlier . But many of the investment decisions are being driven by decision-makers who completed their studies before Google, more influenced by Gordon Gecko of “Wall St” than Al Gore! The sea-change in the way corporations are facing up to our changing world has yet to catch up to the inertia of investment professionals on Wall St, in the City of London and other major investment centers. Investment as usual fails to integrate ESG factors properly. I'm more open for entertainment though - word is there's an update to Wall St, and heck in the past 20 years, cannot say there's no material.

It has become accepted wisdom that “business as usual” will inexorably lead to humans consuming more than the carrying capacity of this one earth’s natural resources, from fossil fuels to potable water to clean air. Investment as usual – the practice of investment management - needs to make a similar adjustment as companies are making in assessing a sustainable future. Matthew J. Kiernan, founder of Innovest Strategic Value Advisors, says traditional financial analysis captures only a quarter of a company's risk and competitive profile. Risk-adjusted returns must reflect a broad and long-term understanding of materiality, within the bounds of fiduciary duty and applied across portfolios and asset classes.

In July, 2007, the United Nations Global Compact annual event keynote address was made by Goldman Sach’s Anthony Ling on behalf of the financial community . It is also true that Hermes has led an engagement on iron and steel companies in the Brazilian supply chain slave labour case. Goldman Sachs presents ten reasons for incorporating ESG factors, three of which were i. experience with risk and return balance, meeting liabilities including identifying global social and environmental challenges, e.g. secure energy supply, climate change, water shortages, BRICs growth, and increasing awareness of ESG issues by analysts and investors. The Goldman Sachs analyst team based in London released a 179-page equity research report titled "GS Sustain" in which it recommended 44 companies based on a combination of companies' ESG performance and fundamentals.

Goldman argued that its picks based on this formulation, both in the U.S. and abroad, outperformed the Morgan Stanley Capital International World Index by 25% over the past two years. A neat approach to selling the quality of your investment ideas. It has been wonderful to watch the London-based team grow from just 2 in 2005, to about 8 now, with more attention from institutional investors than even the GSAM itself. There's an old legend about leaving to find you way, and getting respect in foreign lands, no? Abbey Joseph Cohen will be interviewed by Maria Bartiromo on WSJR next week, maybe it will come up and give the initiative a push...

A recent report by McKinsey indicated investor community ranked only ninth amongst factors leading corporate managers to address societal concerns now and in the next five years. CEOs ranked employees as the stakeholder group that has the greatest impact on the way companies manage their societal expectations. The 391 CEOs surveyed representing 230 organizations in Private/Public, State-owned & NGOs. 90% of company CEOs participating in the United Nations Global Compact said they are doing more than they did 5 years ago to incorporate ESG factors into their strategies. Socially irresponsible business practices might make it harder for companies to attract and retain talented people.

But where is the voice of the investor?