Socially responsible investing

SOCIALLY RESPONSIBLE INVESTING (SRI) - A CASE STUDY

Prepared By: Neha Arora

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CONTENT

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INTRODUCTION TO INVESTING

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DEFINE SRI

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CONCEPT OF SRI

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CURRENT STATUS – GLOBAL

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VARIOUS SRI INDICES

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SUSTAINABLE, RESPONSIBLE AND IMPACT 8 INVESTORS SRI IN INDIA - CURRENT INVESTMENT SCENARIO

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- AREAS OF CONCERNS

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- POTENTIAL OF SRI IN INDIA

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- WAY FORWARD

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REFERENCE LINKS

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Prepared By: Neha Arora

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INTRODUCTION TO INVESTING In the business world, ‘investment’ has two separate but related meanings. For many producers, ‘investment’ means spending money in ways that add to the capital stock of the business, e.g. by extending factory buildings or office buildings, or modernising machinery. Businesses finance this investment either out of profits, through borrowing or by attracting funds through a share issue. Investment can also mean ‘purchasing financial assets in the form of stocks, bonds and shares’. These financial assets yield interest payments (in the case of loan certificates) and dividends (in the case of share certificates). Shareholding also gives an opportunity to enjoy capital gain (or to suffer capital loss).

Investment companies buy a portfolio of financial assets on behalf of their clients, who will include individuals seeking to protect their savings as well as large firms looking for a safe, profitable place to deposit, for example, their pension fund receipts. Investment companies have to be good at identifying and buying financial assets that will yield a good return and at avoiding or discarding investments that look likely to yield a poor return. Millions of people depend either directly or indirectly on the skill with which investment companies build up and manage an investment portfolio on behalf of their clients.

DEFINE SRI

SRI

"Socially responsible investing" is one of several related concepts and approaches that influence and, in some cases govern, how asset managers invest portfolios The term "socially responsible investing" sometimes narrowly refers to practices that seek to avoid harm by screening companies included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing.

• Sustainable, responsible and impact investing • an investment discipline that considers environmental, social and corporate governance (ESG) criteria • to generate long-term competitive financial returns and positive societal impact.

CONCEPT OF SOCIALLY RESPONSIBLE INVESTING (SRI) The idea of incorporating ethical or social criteria into the investment process is not new. Churches, universities and pension funds have been using so called "sin" screens (no tobacco, liquor or gambling investments) as far back as the 18th century. The modern era of socially responsible investing has its roots in the Vietnam War. During the war an increasing number of investors became uncomfortable that their investment dollars were supporting companies supplying the war and they began to look for alternatives.

Interest continued to grow in the nineties with an increase in engagement between SRI funds and companies, a growing number of shareholder resolutions and greater pressure for companies to be transparent about their social and environmental impacts. Nowadays both Private and Institutional Investors are increasingly diversifying their portfolios by investing in companies that set industry-wide best practices with regard to sustainability.

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In one sense, SRI is just like traditional investing because socially concerned investors pursue the same economic goals as all investors: capital gains, higher income and/or preservation of capital for future needs.

However, socially concerned investors want one additional thing: they are demanding greater accountability with respect to where their money is being invested, and for what purposes, they don't want their investments going for things that cause harm to the social or physical environments, and they do want their investments to support needed and life-supportive goods and services. SRI is concerned with identifying and investing in companies that are taking a responsible approach towards their own growth and to economic growth in general. Socially responsible investing (SRI) is about the economics of sustainability.

SRI is accomplished through methods of screening, community investment, and shareholder advocacy.

Screening

- Negative - Positive

Community Investment

Shareholder Advocacy

- Restricted

There are three general methods of screening an individual company for inclusion into an SRI fund; the Negative Screen, the Positive Screen and the Restricted Screen. A Negative Screen, for example, could be a fund manager’s conscious decision not to invest in a company that has any involvement within a particular sector, such as tobacco. Other SRI investments might seek out and invest only in those companies which are involved in activities that promote say “green living,” such as wind or solar power; those types of investment are then referred to as a “Positive Screen.”

Because many corporations tend to become highly diversified as they grow, SRI fund managers make use of a “Restricted Screen” type of filtration. In that way, though a small part of the corporation’s activities may be in a less than desirable sector because the amount is so small relative to the rest of the company’s holdings the SRI investment in the corporation would be permitted.

Shareholder advocacy is exactly what it would seem; socially responsible investors proactively influencing corporate decisions that could otherwise have a large detrimental impact on society. The various goals of shareholder advocacy is to pressure those entities into improving practices and policies and acting as a good corporate citizen, while at the same time promoting long-term value and financial performance. The goals are accomplished through various means including dialogue, filing resolutions for shareholders’ vote, educating the public and attracting media attention to the issue, which generally garners support and puts additional pressure on the corporation to do the socially responsible thing Community investing has become the fastest growing segment within SRI, with some $61.4 billion in managed assets. With community investing, investors’ capital is directed to those communities, in the U.S. and abroad, which are under served by more traditional financial lending institutions and gives recipients of low-interest loans access to not just investment capital and income but provides valuable community services that include healthcare, housing, education and child care.

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SRI is also a good way of persuading firms to change their ways. SRI makes good business sense.

Experience has shown that the financial returns from investing in companies that are run in a socially and environmentally responsible manner are more than equal to the returns available from those firms with a rather less caring approach.

The high returns being earned by investment funds placed with socially responsible companies demonstrate that, contrary to popular belief, it is possible to demonstrate concern for the environment, future generations, and ‘green issues’ without becoming penniless in the process. Being a socially responsible business or a supporter of socially responsible businesses does NOT need to become a formula for finishing up in a bankruptcy court.

Companies that manage their social and environmental impacts, as well as their financial matters, are more likely to be able to operate their business more efficiently and effectively.

CURRENT STATUS - GLOBAL Socially responsible investing is a global phenomenon. With the international scope of business itself, social investors frequently invest in companies with international operations. As international investment products and opportunities have expanded, so have international SRI products. The ranks of social investors are growing throughout developed and developing countries.

Socially responsible investing is a booming market in both the US and Europe. In particular, it has become an important principle guiding the investment strategies of various funds and accounts. Assets in socially screened portfolios climbed to $3.74 trillion at the start of 2012, a 22% increase since 2010, according to the US SIF's 2012 Report on Sustainable and Responsible Investing Trends in the United States. As of 2012, nearly one of every nine dollars under professional management in the US is involved in socially responsible investing—11.3% of the $33.3 trillion in total assets under management tracked by Thomson Reuters Nelson. Research estimates by financial consultancy Celent predict that the SRI market in the US will reach $3 trillion by 2011. The European SRI market grew from €1 trillion in 2005 to €1.6 trillion in 2007.

Sustainable and Responsible Investing in the United States in 2012: $3.74 trillion

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VARIOUS SRI INDICES Trade organizations keeping track of SRI growth include the US SIF: The Forum for Sustainable and Responsible Investment in the U.S., the Social Investment Organization in Canada, EuroSIF in the E.U., the Association for Sustainable and Responsible Investment in Asia, and the Responsible Investment Association of Australasia. In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment. The Principles provide a framework to help investors incorporate environmental, social, and governance (ESG) factors into the investment process.

The Carbon Disclosure Project (CDP) is an international, not-for-profit organization providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information. The CDLI recognizes companies and organizations for their approach to disclosing climate change strategies, while the CPLI recognizes only the companies that are taking positive measures to mitigate the effects their operations have on climate change.

Website: www.cdproject.net

The Ethibel Investment Register is used as the basis for Socially Responsible Investment (SRI) products for a growing number of European banks, fund managers and institutional investors.

Website: www.ethibel.org

Jantzi Social Index速 is a market capitalization-weighted common stock index consisting of 60 Canadian companies that pass a set of broadly based social and environmental screens.

Website: www.jantzisocialindex.com

The Dow Jones Sustainability North America Index (DJSI North America) comprises the top companies from North America in terms of economic, environmental and social criteria, and provides a benchmark for sustainability-driven North American equity portfolios.

Website: www.sustainability-index.com

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The Ethical Funds Company offers a family of socially responsible mutual funds, with more than $2.4 billion in assets under management, which are also distributed through qualified investment professionals, discount brokers, life insurers and other institutional partners.

Website: www.ethicalfunds.com

FTSE4Good Index is a financial index series that is designed by the Financial Times Stock Exchange to identify and facilitate investment in companies that meet globally recognized corporate responsibility standards.

Website: www.ftse.com

The Johannesburg Stock Exchange (JSE) Socially Responsible Investment (SRI) Index promotes sustainable and transparent business practices. The SRI index series has evolved considerably since it was launched in May 2004. The advent of sustainability initiatives internationally and the King code locally, also saw the index created to foster good corporate citizenship and promote sustainable development.

Listed companies in the FTSE/JSE All Share index are reviewed annually. The measurement is conducted against a holistic set of Environmental, social and governance (ESG) and related sustainability concerns and a fourth area of climate change. Inclusion in the Index is determined through an aggregation methodology in relation to the indicators based on analysis of the public information companies produce.

Website: https://www.jse.co.za

MSCI is a leading provider of investment decision support tools to over 6,000 clients worldwide, ranging from large pension plans to boutique hedge funds. We offer a range of products and services - including indexes, portfolio risk and performance analytics, and ESG data and research - from a number of internationally recognized brands such as Barra, RiskMetrics and IPD. Located in 23 countries around the world, and with over 2,600 employees, MSCI is dedicated to supporting the increasingly complex needs of the investment community with groundbreaking new products, high quality data, superior distribution and dedicated client support. When a business adopts a broader view of its economic, social and environmental responsibilities it is serving the interests not only of society as a whole but of itself as well.

The MSCI Global SRI Indexes are benchmarks for investors seeking exposure to companies with outstanding sustainability profiles and avoiding exposure to companies that produce goods and services considered to have highly negative social or environmental impacts. The MSCI Global SRI Indexes include companies with very high ESG ratings relative to their sector peers and exclude companies involved in alcohol, tobacco, gambling, civilian firearms, military weapons, nuclear power, adult entertainment and genetically modified organisms (GMOs). The indexes target companies with the highest ESG ratings making up 25% of the adjusted market capitalization in each sector of the underlying index.

Website: http://www.msci.com/ Prepared By: Neha Arora

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SUSTAINABLE, RESPONSIBLE AND IMPACT INVESTORS SRI investors comprise:        

Individuals who invest—as part of their savings or retirement plans—in mutual funds that specialize in seeking companies with good labor and environmental practices.

Credit unions and community development banks that have a specific mission of serving low- and middle-income communities.

Hospitals and medical schools that refuse to invest in tobacco companies.

Foundations that support community development loan funds and other high social impact investments in line with their missions.

Religious institutions that file shareholder resolutions to urge companies in their portfolios to meet strong ethical and governance standards.

Venture capitalists that identify and develop companies that produce environmental services, create jobs in low-income communities or provide other societal benefits.

Responsible property funds that help develop or retrofit residential and commercial buildings to high energy efficiency standards.

Public pension plan officials who have encouraged companies in which they invest to reduce their greenhouse gas emissions and to factor climate change into their strategic planning.

SRI IN INDIA CURRENT INVESTMENT SCENARIO There are insufficient data to make a reliable estimate of the proportion of FII assets in India that are managed under ‘sustainable’ or ‘socially responsible’ mandates. Of the 1,500 or so FIIs registered in India, brokers estimate that no more than 100 are active. The Bombay Stock Exchange is the 8th largest in the world, with an equity market capitalization of USD 1.63 trillion as of December 2010. But less than a thousandth of that — about USD 1 billion — represents “total stock of investment in Indian equities where the investment strategy includes a strong focus on environmental, social and governance (ESG) considerations,” according to the 2009 report “Sustainable Investment in India,” which was prepared for the International Finance Corporation (a member of the World Bank Group) by The Energy and Resources Institute, Europe (TERI-Europe). That investment comes almost entirely from foreign institutional investors (FIIs). The 2007 version of the report “concluded that India was relatively unprepared for foreign sustainable investment and that this should be seen as a strategic risk to the country’s global competitiveness and sustainable development”.

Low CSR

Low SRI

Strategic Risk

FIIs wishing to engage with portfolio companies on issues related to human rights often experience difficulties when dealing with Indian companies, who (along with Chinese firms) are frequently unresponsive. This is particularly the case in relation to companies with operations in countries such as Burma and Sudan. For example, Amnesty International, Genocide Intervention Network (GIN) and Investors Against Genocide have called for US investors to boycott India’s Oil and Natural Gas Corp (ONGC) over its operations in Sudan following similar campaigns against Chinese and Malaysian oil firms.

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ONGC has invested nearly US$1bn in Sudanese oilfields and is one of the top three players in the oil sector in that country.

In sharp contrast to other BRIC markets such as Brazil, in practical terms, pension funds are largely absent in India and are of little or no immediate relevance to the development of a domestic sustainable investment market. There are two main reasons for this. Firstly, India does not have a comprehensive old age income security system. India’s workforce consists of two groups: organized (or formal sector) and unorganized (informal sector). About 10 per cent of India’s workforce are organized workers, and as such, are covered by state provident funds or private pension schemes. The remaining 90 percent of workers fall into the unorganized sector, with only minimal benefits. Secondly, the regulations that apply to provident funds and other retirement schemes have historically been based solely on investment in government-run saving plans and fixed income instruments. The idea that such schemes might invest in equities is relatively new and politically controversial. The overall pensions fund system in India is varied, very complex and in a state of significant change.

Globally SRI has emerged as one of most powerful trends among the investment community of the developed world, concept is still in a nascent stage in India. For common equity investors in India who wants to invest on SRI theme, availability of readily available investment opportunities (mutual fund or ETF) is scarce. According to the Association of Mutual Funds in India (AMFI), there are almost a thousand mutual fund products on the market at the current time with combined value of about US$105 billion.

However, S&P and CRISIL had launched an index based on environmental, social and governance (ESG) theme few years back; the index is known as S&P ESG India.

The S&P ESG India is an index that provides investors exposure to 50 of the best performing stocks in the Indian equity market as measured by environmental, social, and governance parameters. The index represents the first of its kind to measure environmental, social, and corporate governing practices based on quantitative rather than subjective factors with the implementation of a unique and innovative methodology. The top 10 constituents include Mahindra & Mahindra, Wipro, Infosys, HCL Technologies, ITC, TCS, Tata Chemicals, Dr. Reddy’s Laboratories, L&T and ACC. Software, Banking, Automobiles (4 wheelers), Pharmaceuticals, Power, Cement, Refineries and Steel industry have more than 4% weight-age in the index. Index quote and more information can be found on NSE website.

Launched in March 2007, ABN Amro Sustainable Development Fund (now called Fortis Sustainable Development Fund) is the first SRI fund to collect money in India, for investing in companies with good environment, social and governance values. Indian investors are not ready for SRI funds as yet. There is a feeling that fund managers will compromise on returns for the sake of meeting social objectives.

At the end March 2008, India’s life insurance industry had assets of around about US$42 billion in equities, corporate bonds, debentures and loans with no ESG investment. An analysis of existing sustainable investment practices in the Indian private equity/venture capital market can be broken down into three main (but overlapping) topics: ate equity funds (i.e. funds that are not specifically focused on sustainability-related investment themes);

and renewables; and ds and related technical assistance programs focusing on social enterprises and sustainable entrepreneurs towards the ‘base of the pyramid’.

Apart from the S&P ESG India Index, there are no other sustainability or similar indices focusing specifically on Indian stocks. The September 2008 review of the Dow Jones Sustainability Index (DJSI) World led to the inclusion of Indian companies for the first time. Two Indian companies were added to the DJSI – Tata Prepared By: Neha Arora

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Steel and Tata Consultancy Services. There are no Indian companies in the DJSI Asia-Pacific Index. A small number of Indian stocks (for example, the wind turbine technology firm Suzlon) feature in global cleantech indices such as HSBC’s Climate Change Index family and the Cleantech Index ™ (CTIUS).

Indian sell-side broker/dealers (as distinct from international investment houses and their local offices) do not produce any equity research focusing on environmental and social sustainability issues. We are not aware of any efforts that have been made to engage them on these issues. With regard to international investment houses, Indian stocks are still under-researched in terms of ESG issues and certainly have not received any coverage of the kind being promoted in Europe and the US under programmes such as the Enhanced Analytics Initiative (EAI).

AREAS OF CONCERNS The most critical aspect of SRI is the development of non-financial metrics relating to ESG factors which can be used for evaluation, screening and analysis of socially responsible investments. While corporate governance factors such as compliance with local regulations, upholding minority rights, executive compensation, board diversity and independence are comparatively easier to report, track and evaluate for Indian companies, more development is needed of reporting and analyzing factors relating to social and environmental risk management, climate impact, corporate social responsibility themes, labor standards, etc. Data on environmental and social themes is not readily available from companies in India.

POTENTIAL OF SRI IN INDIA Estimated stock of sustainable investment in India:

Source: IFC Sustainable Investment Country Reports WAY FORWARD With the new Companies Act 2013 under section 135, CSR implementation and reporting has been made mandatory for the Indian companies which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities.

The new reporting format will certainly assist in better evaluation of the factors leading to SRI. Although initiatives such as the S&P ESG India Index are an important first step, the financial community of Mumbai and New Delhi still has little or no “infrastructure” for sustainable investment by either domestic or international investors. Socially Responsible Investment will get a boost in India if Securities and Exchange Board of India (SEBI) promotes the existing S&P ESG. SRI related workshops, online documents etc.

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should be arranged to educate the Indian Investors, mutual funds etc. about the benefits of SRI. Domestic investors in mutual funds and equity-linked life insurance products seem to have little or no appetite for sustainability-related products at present. Efforts aimed at mobilising domestic investors would need to have a long-term time frame. Industry bodies and SEBI should step forward and work together in this direction.

In general, even firms with a global sustainable investment brand are not actively engaging in sustainable investment in the Indian mutual fund and life insurance market. The barriers to doing so are probably greater for firms that have entered India through local joint ventures. FIIs that have a corporate position on ESG investment form a healthy proportion of India’s FII community. The main challenge is likely to be achieving some improvements in coordination and critical mass, and creating an effective route into the Indian investment and business establishment.

In terms of achieving real change and added-value, the most effective strategy for developing India’s sustainable investment market is likely to be one that focuses in its initial stages on two main constituencies: FIIs and Indian corporations. The key strategy is to convene interested FIIs and achieve some degree of critical mass, agreement on key issues, and organisation. The second key element of this proposed strategy is facilitate interaction between FIIs and Indian corporations that is business focused, adds value and will achieve real change. The way that interaction between these two groups is packaged and facilitated will be crucial to its credibility and outcomes: in particular, the right Indian entities must be involved.

Although the domestic mutual fund industry is still far behind in incorporating sustainability issues, there is an opportunity here to raise awareness levels and encourage thinking on integration of ESG issues. One way to do this is by facilitating dialogue with FIIs who are investing in India and have a more advanced ESG agenda. Another possibility could be to commission market research on retail and HNW investor attitudes to sustainable investment.

This flurry of activity would help in recognition of the need to internalize environmental and social considerations into financial markets in order to promote more sustainable development.

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REFERNCE LINKS 1. http://businesscasestudies.co.uk/henderson/socially-responsibleinvestment/introduction.html#ixzz3HKhIpNKN 2. http://www.scotiabank.com/ca/en/0,,393,00.html 3. http://en.wikipedia.org/wiki/Socially_responsible_investing 4. http://www.investopedia.com/terms/s/sri.asp 5. http://www.pirelli.com/corporate/en/sustainability/sust_eval/default.html 6. http://www.ussif.org/sribasics 7. http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-youneed-to-know/ 8. http://www.marketexpress.in/2013/04/socially-responsible-investing-in-india.html 9. http://articles.economictimes.indiatimes.com/2007-06-05/news/27674972_1_fund-manager-indianinvestors-investor-response 10. http://www.ingovern.com/2013/03/socially-responsible-investing-in-emerging-markets/ 11. http://www.indiacsr.in/en/tapping-into-ancient-mercantilism-corporate-social-responsibility-andsustainable-investing-in-india-by-reynord-loki/ 12. www.investing.com/indices/s-p-esg-india

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