A Change Fusion – CSR Asia working concept paper on Establishing socially responsible investment (SRI) criteria in Thailand: Background and standard criteria comparison First draft 3.11.08 (internal document) Overview, global & regional development Socially Responsible Investing (SRI) also known as sustainable investing or ethical investing, describes an investment strategy which seeks to maximize financial return using additional investment criteria that falls outside the traditional financial appraisal model. SRI allows investors to take account of wider concerns and encompasses a wide range of corporate best practices for environmental, social and governance factors (ESG). Led by institutional investors, asset and fund managers are increasingly informed on ESG criteria and are starting to realise that SRI is not just about incorporating additional values into decision making. An SRI focus is also about hedging against the downside of globalisation, long term stability and performance and sourcing additional returns. This has been sharply brought to light with the current financial turmoil and macro trends such as climate change and the instability of fuel costs coupled with dwindling supplies. Whilst Corporate Social Responsibility (CSR) is a now a more mainstream term used by many organisations, a recent survey by AXA Investment Managers and AQ Research of over 350 global investment professionals, found that ‘ESG’ and ‘sustainability’ has emerged as preferred terms associated with the SRI field from a selection of 14 other choices. SRI is applicable to many types of financial products, but in practice it is mostly applied to stocks (equity securities). The quantification of ESG performance in the U.S. and in Europe is increasingly professionalised using a combination of resources such as; • • •
• •
Specialised rating agencies provide ESG analysis to the market More and more financial companies set up their own SRI analysis departments Market indices such as the Dow Jones Sustainability Index (DJSI) or FTSE4Good, supply fund managers with dedicated investment universes where selection for an index is based both on financial and non-financial performance. The development and growth of the United Nations Principles for Responsible Investment (UNPRI) NGOs provide their own expertise and assessment of issues and corporation, for example Oxfam has recently looked at the ESG performance of companies listed on the Hong Kong Stock Exchange.
Depending on the fund’s orientation and commercial scope, each asset owner/manager who is using ESG criteria in their investment appraisal process, relies on a combination of these resources to pick stocks for inclusion in that institution or fund’s investment universe. Global SRI SRI has experienced high growth in both the United States and Europe. In the US SRI has outperformed the broader universe of all investment assets under professional management. It is estimated that 11 percent of assets under professional management in the US (or nearly one out of every nine dollars) distributed across 246 funds now have some form of SRI criteria associated with them. In fact, SRI assets rose more than 324 percent from US$639 billion in 1995 to US$2.71 trillion in 2007 while the broader universe of assets under professional management experienced a
growth of 260 percent from US$7 trillion to $25.1 trillion. During 2005-2007, SRI assets increase more than 18 percent while the broader universe increased less than 3 percents.1 In Europe, SRI has also been on a continuous upward growing cruve; the market grew from €1 trillion in 2005 to €1.6 trillion in 2007 distributed across 451 SRI funds in Europe.2 In South Africa alone, SRI flow invested in 21 SRI funds amounted to US$1.6 billion. Watson Wyatt recently launched Defining Moments, a research publication that describes a radically changing investment landscape that presents both problems and opportunities for investors. It identifies several macro trends that are likely to be well established by 2020. These include the growing impact of environmental, social, and governance considerations both as indirect sustainable performance influences and as desirable end attributes in their own right. SRI in Asia SRI has gained a significant foothold in emerging markets. Roughly US$32.2 billion was invested in more than 235 SRI mutual funds (Unit Trusts) in Asia.3 Below are classification of funds and investment flow to SRI in Asia Pacific region. Total Number of SRI Funds in Asia (including faith-based funds): Public Private SRI FaithFunds Equity Pension based1 Mandates China 2 0 0 0 Hong Kong 19 0 0 1 Japan 59 1 0 0 Korea 37 2 6 0 Taiwan 3 0 0 0 Singapore 3 1 0 10 Malaysia 2 0 0 81 Indonesia 0 1 0 1 India 1 1 0 1 Thailand 2 0 0 1 Segment Total 128 6 6 95 No. of SRI Funds by Country: Asia Hedge Funds:
243 Country Total2 2 20 60 45 3 14 83 2 3 3 235 235 8
Country Australia China Hong Kong Japan Malaysia Multi-Country New Zealand Singapore South Korea Private Equity Fund SRI Mandates Total Private Equity & SRI Mandates
US$ (million) 16,900 325 274 3,131 14 1,034 852 125 1,321 23,976 226 8,110 8,335
Association for Sustainable and Responsible Investment in Asia (ASrIA), More developed markets such as Japan, Korea and Hong Kong have the highest number of funds while new players such as Taiwan, India and Thailand have fewer options available. In Malaysia on the other hand, the majority of assets are set around faith based SRI funds. Most SRI fund’s benchmark are constructed using ESG factors as selection criteria. Some funds advocate to a single cause, pure-plays, while others employ combination of causes including; clean and renewable energy, environmental friendly management, workplace practices and labour standards, ethical policies, corporate governance and transparency.
1 2 3
Social Investment Forum Foundation, 2007 Celent financial Consultancy, 2007 ASrIA 2008
Asset Allocation Asset Class Equity Bonds Venture Capital/Private Equity Alternative/Hedge Fund Real Estate/Property Monetary Deposit Commodities Microfinance Eurosif, 2008
% 46 13 13 9 5 4 4 6
Equities form the majority asset class employed by investors, followed by debt instruments such as bonds. A survey conducted by Eurosif 1 indicates that 46% of the investment in European SRIs is in the form of equity investment while 13% of the investment is in bonds. As investors become more open to the alternative investment options, venture capital investment has also begun to gain ground in the SRI investment space.
As shown in the table, investment flow that go into venture capital or private equity weights as high as bonds. In the U.S. an estimated of US$5.3 billion in capital was identified under the management of socially or environmentally screened alternative investment vehicles such as social venture capital, double-and triple-bottom line private equity and hedge funds, typically organised as unregistered limited partnerships or limited liability companies. Moreover, an estimated US$26 billion went into community investing institutions that directed capital to communities underserved by traditional financial services. Nevertheless, investors still invest mainly in large caps while the share of small and medium caps is quite insignificant. This is largely due to the lack of appropriate ESG data available to offer financial products from companies in the small and medium cap sector. In this sense there is a definite need to develop research capacity and capability to allow small and medium caps to tap into the potential SRI investment flow. SRI Indices A number of SRI indices have developed over the last few years and have concentrated on tracking listed companies with ESG performance appropriate to their individual criteria. The eligible universe for SRI index usually lies within common stock indices therefore the companies are subjected to the ground rules of that particular index as well as additional SRI criteria which place greater emphasis on ESG standards. An SRI index can either be sector specific or sector neutral. Sector neutrality actually limits the financial risk associated with sector bias. In fact, an SRI index and sustainability index are relatively similar. Well know sustainability indexes in the U.S. and in Europe such as DJSI, FTSE4Good, Ethibel Sustainability index, Calvert Social index, KLD’s Domini400Social index are being referred to as both sustainability index and SRI index. Nevertheless, SRI index is created to cater to a more specific need in term of socially responsible investment. In Asia, Japan, South Korea and Hong Kong are market leaders in SRI indices . An well planned and developed SRI index will not only raise the general profile of ESG and SRI among the local companies but also attract a growing number of SRI investors from overseas. As the market for SRI in the U.S. and Europe is becoming more developed, SRI investors are continuously looking to the Asia Pacific region to expand their investment portfolio. However, they are severely limited by the fact that there is little in the way of high quality research for Asian companies. This is partly due to a lack of disclosure on the part of companies, but also the fact that ESG research has not been forthcoming.
Thailand SRI opportunity To many in the SRI sector, it is clear that even with active engagement from investors, assets owner and fund manager, they can only go so far in encouraging responsible business strategies from the corporate world. There is also a role for public policy to address economic externalities The Stock Exchange of Thailand should try to effectively tap into current global SRI flow and actively encourage and incentivise the creation of more SRI funds as well an SRI index. This will involve helping to facilitate both local and foreign players in gaining access to accurate information as well as providing a positive framework SRI investment in Thailand. Globally, policy-makers have begun to realise the role that investors and their engagement strategies can play in encouraging good corporate practices. Especially in the current investment climate, responsible investment can be used as a policy tool for achieving improved performance on ESG indicators. Regional development of SRI has been fast and robust Malaysia and Singapore have just launched their sustainability index early this year. SET should follow the global trend in order not to lack behind the regional counterpart. In order to attract SRI investors, local companies must being to meet globally accepted ESG standards including environmental performance and measurement of emission, commitments to employees, supply chain standards and improved governance, ethics and anti-corruption policies. A company can advance their efforts by producing a sustainability report and complying with standards such as GRI (Global Reporting Initiative) reporting system indicators. A great example from Thailand is the Siam Cement Group which has been the country’s leader in producing sustainability report following GRI guidelines and incorporating ESG factors into its business strategy and decision making. The company is listed on Down Jones Sustainability Index and was recently place sixth in the CSR Asia Business Barometer.
Social screening & standard comparison In realizing Thailand SRI opportunity, the first issue to address is of social screening criteria standard. Currently a number of emerging rating indexes which prioritize both economic and social performance that track and rate the financial performances of leading sustainability-driven companies. Among them includes Down Jones Sustainability Indexes (DJSI), FTSE4Good index series, KLD’s Broad Market Social Index or the Domini 400 and Calvert Social Index. All are designed to track the performance of the companies that meet globally recognized corporate responsibility standards. Besides Indexes and rating agencies, SRI fund managers perform similar function in identifying socially and environmentally responsible investment options. When conducting a social screening, fund manager or the rating agency often rely on •
Negative screening process. This process eliminate companies that produce certain products such as tobacco and liquors or engage in certain activities which are considered as unethical to the society such as gambling or military weapons.
•
Positive screening process. Most of the leading managers of socially screened funds also proactively look for positive or “best-in-class” factors as well. Positive screening that follows essentially rank the remaining companies on a wide range of ESG (environment, society and governance) factors. Some investors go beyond positive screening by applying Second-Order Screening. This not only screens out companies that fail to fit the initial criteria but also screening out companies that conduct business with them.
In fact, the quantification of ESG performance in the U.S. and Europe is increasingly professionalized using a combination of resources such as social reporting system (GRI) or sustainability reports, and International standard for social responsibility such as ISO26000. These reporting and management standard effectively facilitate the social screening process as they often provide relevant data with regards to firm’s social and environmental performance.
The following table compares issues which are used by reporting and management standard as well as the rating agency. Sub-Issue
GRI
ISO 26000
DJSI
X
X
X
X X
X X
X X
Protection and restoration of the natural environment (biodiversity) Labor practices
X
X
Occupational Health and safety
X X X X
X X X X
X X X X X
X X X X X
X X X X X
X X X X
X X X
X X X
X X
X X X
X X X
Environment Prevention of pollution and careful management of emissions, effluents, and waste treatment. Sustainable and efficient resource use and conservation. The use of alternative renewable and low impact resources.
Human development Diversity and equal opportunity Employment, labor relations and social protection Talent attraction and retention Human Rights Discrimination and vulnerable group Freedom of association and collective bargaining. Fundamental right at work Forced and compulsory labor as well as child labor policy Investment and procurement practice or due diligence Society/Fair Operating Practices Anti corruption policy Responsible Political Involvement Anti-Competitiveness behavior policy Product Responsibility/Consumer issues Customer health and safety Product and service labeling. Fair marketing and contractual practices. Customer relationship management
X
Community involvement and Development. Community involvement social investment
X X
X X
X X
responsible investing; incorporate economic, environment, social and governance issues into investment analysis
X
X
X
measure to improve their social performance
X
X
Corporate citizenship or Philanthropy
X
Governance Organizational governance that incorporate social responsibility (including accountability, transparency and ethical code of conducts) into the decision making process.
X
X
X
Stakeholder engagement that extend to include communities, civil society, customers, shareholders and providers of capital, suppliers, employees and other workers and their trade. Mechanism for shareholders and employees to engage in two way communication with the highest governance body.
X
X
X
X
Linkage between compensation for members of the highest governance body, seniors, and executives.
X
Mechanism to avoid conflict of interests
X
X X
Corporate Responsibility Monitoring and Risks and Crisis Management
X X
* DJSI criteria employed here derived the which is the most important source of information for the assessment according to http://www.sustainability-index.com/07_htmle/assessment/infosources.html
The sustainability assessment procedure usually involves the questionnaires which are distributed to the companies listed on investable stock universe. The responses (singed by a senior company representative) together with evaluations based on companies documentations will be analyzed and verified again by independent analysts from the rating agency or research organizations. Beside the company documentations such as annual report/sustainability report/internal documentations, reviews on media, press release as well as articles and stakeholder commentary written about a company over the past year will be examined to further verify the validity of the responses. If the companies are to meet all the established criteria and pass the overall screening process, they will be considered as “socially responsible companies.” These firms will be listed on different sustainability indexes or be included in the universe of SRI investable stocks and bonds. In particular, to build a socially screened equity portfolio, the management team will uses a quantitative model to build an index-like portfolio that selects socially responsible stocks to come as close as possible to the overall characteristics of the original stock universe (that include firms who fail to pass the social screening process) by a range of factors, including the level of returns and risks. Socially screened funds should also track closely to mainstream benchmarks for the investors to ensure that the fund can fit cleanly into an appropriate asset allocation. Moreover, in the end, the conventional benchmarks represent the touch stones to which the performance of socially screened funds will be compared. In Thailand, as SRI criteria and index are being explored, Change Fusion proposes the following; •
Working guideline development. Financial authorities such as the Stock Exchange of Thailand (SET), Securities and Exchange Commission (SEC) as well as other related organizations should form a working group that further explore key SRI criteria such as those compared in this paper. The short-term goal is to issue a working guideline of SRI criteria that the listed companies and investment funds could use to begin gather relevant data for the more formal establishment of SRI criteria and indexes in the near future.
•
Partnership between interested mutual fund and research partners. Mutual funds with strong interest to establish pioneering SRI fund in Thailand could partners with research organizations (global, regional and local with relevant expertise) in order to develop a working SRI criteria where research organizations could independently gather data from targeted listed companies relevant to run against the working SRI criteria. Through this process, pioneer SRI funds could be developed before the national standard SRI criteria is formally launched.
Further standard criteria reading list DJSI www.sustainability-index.com/ FTSE4Good www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp KLD http://www.kld.com/indexes/ds400index/index.html ISO26000 www.iso.org/sr GRI www.globalreporting.org/ Related SRI development reading list Social Investment Forum http://www.socialinvest.org/ Eurosif http://www.eurosif.org/ Association for Sustainable and Responsible investment in Asia http://www.asria.org/ SRI Asia http://www.sri-asia.com Working team Change Fusion, CSR Asia, Sarinee Achavanuntakul Contact Narissa Shrestha, Coordinator
[email protected] Change Fusion 444 Olympia Thai Tower, 22nd. Fl., Ratchadaphisek Rd., Samsemnok, Huaykwang, Bangkok 10310 Thailand. www.changefusion.org Tel. +662 938 2636 , +662 513 4192 Fax +662 938 1877