BSR Conference 2012: Fast Forward / October 23-26 / New York

Environmental, Social, and Corporate Governance (ESG) Investments in Emerging Markets

One-Hour Conversation Session / October 24, 2012

Speakers

  • Paulo Corchaki, Chief Investment Officer, Itaú Asset Management
  • Seiji Kawazoe, Associate General Manager, Sumitomo Trust & Banking Co.
  • Miguel J. Martins, Global Product Specialist, Sustainable & Inclusive Investing, Sustainable Business Advisory Department, International Finance Corporation
  • Laura Gitman, Managing Director, Advisory Services, BSR (Moderator)

Highlights

  • Innovation in social, environmental, and governance (ESG) is now coming from emerging markets. There is a necessity to look beyond financial metrics, since there are weaker regulations and enforcement in emerging markets. Integrating ESG criteria into valuations can better account for risks and opportunities.
  • Growth in the financial services industry in emerging markets will come through partnerships with civil society. Reaching bottom-of-the-pyramid consumers with financial products requires civil society partners to build capacity through educational initiatives.
  • Companies performing well according to ESG metrics are also financially outperforming the market in general. ESG performance is correlated to financial performance. Companies will make further ESG progress as they understand investors’ interests.

Memorable Quotes

“ESG is important. It’s not a fad. It’s not the flavor of the decade. It’s here to stay. I would invest much faster in Brazil and China than in Portugal, Greece, or Spain. ESG permeates the entire world, and it has to do with all of us” —Miguel J. Martins, International Finance Corporation

“We made a correlation between good credit and quality management and governance. In Brazil, companies are…becoming more transparent with their balance sheets related to ESG issues. But they do not yet know what is important for investors.” —Paulo Corchaki, Itaú Asset Management

“To actively promote ESG management in your investments, you must have a good, long-term relationship that goes from the executive to manager levels.” —Seiji Kawazoe, Sumitomo Trust & Banking Co.

Overview

Gitman kicked off the session by challenging the assumption that firms in emerging markets are further behind on ESG integration. Due to the lack of regulatory enforcement in emerging markets, there is actually a much more robust business case for ESG. There is a necessity to look beyond traditional finance metrics, and emerging markets are the source of innovation and progress in that area. Gitman also highlighted that one can approach ESG from the perspective of a financial institution making investment decisions or of a business thinking of attracting investment and evaluating risks and opportunities in a new way.

Martins cited key ESG trends in emerging markets. First, ESG is private-sector driven. Second, there has been a shift to measure what has previously been immeasurable, for example, natural capital accounting. Kawazoe emphasized that emerging markets represent an opportunity to tap into a growing population of middle-income earners. ESG issues involve those stakeholders. Corchaki shared his perspective on how Brazilian banks and companies view ESG as business strategy and are deeply integrating ESG issues into how they operate.

Gitman asked how the panelists integrate quantitative ESG metrics into their valuations. Corchaki explained that moving from qualitative to quantitative evaluations is very difficult and that Itaú is going sector by sector to understand how ESG affects company valuations. Industries including mining, oil, and steel are receiving lower valuations, according to ESG metrics. Kawazoe discussed the importance of field research that goes beyond company reports to understand a company’s historical ESG performance.

Gitman then asked why emerging markets see more ESG innovation than developed markets and the geographic differences in ESG innovation. Martins pointed out that in Asia, the “S” is the most important piece of ESG and referenced microfinance as evidence. Latin America emphasizes the “E” due to the region’s natural capital wealth. Corchaki also pointed out that despite the importance of environmental performance on corporate valuations in Brazil, many international investors are focused on the growth of the middle class and domestic consumption. Therefore, the “S” is of rising significance in ESG innovation in Brazil. Martins then provided an example of ESG innovation in South Africa as it relates to mobile banking technology. When a technology company, WIZZIT Payments, approached traditional South African banks with mobile solutions for the financial services sector, those banks hesitated. Now, mobile banking solutions, along with WIZZIT, are the fastest growing players in the sector. Martins made the point that despite initial costs, ESG innovation relates to long-term opportunities.

In the question-and-answer session, one audience member asked about how the panelists actively engage in their investments. Kawazoe talked about the need for open communication, a long-term relationship, and connections with company employees from the executive to the manager level.

Another audience member asked about the role of civil society in guiding strategy for ESG investment and innovation in emerging markets. Martins emphasized the importance of partnerships with civil society. There is a limit to what the private sector can do alone. Given that banks’ customers in emerging markets often have other needs, civil society must take part in building capacity. For example, a bank is unable to sell a single financial product to a farmer if that farmer has less than a rudimentary understanding of money. The challenge, to Martin, is how various players in the space begin interacting and building collaborative solutions.

Concluding the session, Gitman asked where ESG will be in five to 10 years. Martins summarized the tremendous opportunities in infrastructure, innovation, and information. Infrastructure opportunities include advanced distribution models to deliver vital resources like water and food. Innovation opportunities relate to technology that will further change and improve access to financial services in emerging markets. Finally, Martins described that companies have an opportunity to communicate more ESG information through reporting to become more transparent and to attract new investors. Kawazoe offered his assessment of the next five to 10 years by explaining that ESG will be further integrated into business models through rigorous data management. He encouraged the audience to invest now, since companies with robust ESG management will yield good returns.



Thank You, Sponsors

Executive Sponsors

Cisco Hitachi PwC Target UL Responsible Sourcing

Associate Sponsors

Anheuser-Busch InBev

Supporting Sponsors

Adobe AT&T ExxonMobil Green Mountain Coffee Roasters, Inc.

Participating Sponsors

American Express Baker & McKenzie LLP Best Buy BNY Mellon Ford Hyatt Hotels Corporation The Walt Disney Company UPS Vale

Contributing Sponsors

Chevron icix Levi Strauss & Co.

Convening Media

Bloomberg Business Week Weber Shandwick

Marketing and Media

3BL Media BEF Caixin Media Corporate Knights Globescan GreenBiz Group Inc. Hemlock Responsible-Investor Sina Stanford Social Innovation Review (SSIR) Tomorrow Partners