Mainstreaming principles of responsible investment

Amol Titus ,  Jakarta   |  Wed, 12/30/2009 10:49 AM  |  Management

A crucial practical dimension of corporate governance is the adoption of high standards related to environment, social and governance (ESG) criteria that can ensure corporate activities are undertaken responsibly and transparently. Listed companies and financial sector constituents (pension funds, asset managers, banks, etc.) in particular also need to demonstrate that ESG issues have been factored into their business models and investment decisions. This is growing in importance as overseas investors try to distinguish developing country capital markets based on the robustness of ESG adoption and disclosure standards.

Amol Titus, CEO of international management consulting firm IndonesiaWISE, which along with Minaca Selaras, IDX, Jamsostek and other key institutions, has embarked on the Indonesia specific research component of a prominent global Emerging Markets Disclosure project, spoke to London-based
Dr James Gifford, executive director of the Principles for Responsible Investment (PRI) Initiative (a partnership between institutional investors, UNEP Finance Initiative and UN Global Compact) who was in Jakarta recently for a bio-diversity conference. He has a PhD from the School of Economics and Business, University of Sydney.

 

Question: What is the thinking behind the Principles of Responsible Investment (PRI) and how are these relevant to an emerging market like Indonesia?

Answer: The goal of the PRI is to mainstream the incorporation of ESG issues into mainstream investment management, for the purpose of creating, over the long-term, a more prosperous, sustainable and well-governed economy.

For Indonesia, it’s about creating world-class companies, enhancing investment attractiveness of the market, promoting good governance and encouraging companies to tap into global capital.

 

In the last 18 months the credibility of investment funds and institutions has been eroded certainly with respect to due diligence being undertaken. How can you be sure the PRI are sufficiently incorporated in the due diligence criteria? Is there objective third party assessment of this?

The PRI Principles are aspirational but there is an annual reporting and assessment process to monitor signatories’ progress. But the integrity of investors’ due diligence can only really be driven by their clients or regulators.

Pension funds, in particular, need to monitor their fund managers to a much greater degree than they have in the past, and I believe this is happening. There are considerably more resources going into due diligence on ESG issues and availability of data.

 

The commodities sector – both agricultural and mineral – is expected to be a major driver of the IDX in future. But environmental and social NGOs have a long list of complaints against some of the large commodity players, both currently listed and those proposing to list. How should investing funds reconcile company claims and PR with NGO views which often highlight seemingly irreconcilable gaps?

The first priority is to have the internal capability to understand the issues facing the company and communicate with all stakeholders. Many global investors now have specialist staff with experience in ESG issues, and are integrating these staff into mainstream investment teams.

Investors also need the capability to engage in dialogue with companies to encourage them to improve, where they see companies not managing issues appropriately. There will always be seemingly irreconcilable gaps between the short-term goals of some companies and the demands of some NGOs, but if we look over the long term, NGO expectations often end up being embedded in regulation or demanded by customers and ultimately adopted as business-as-usual. Investors should play a constructive role and encourage companies to adopt leading ESG practices.

 

In your experience, how has the PRI centered attitude and approach of funds influenced corporate behavior in emerging markets? Can you provide some concrete examples of adoption of responsible practices?

It is fair to say that shareholder engagement in emerging markets is still in early days. But it is on the rise. In 2008, investors contacted over 100 apparel and home furnishings companies thought to be using cotton supplied by forced child labor in Uzbekistan.

Companies such as Benetton and Marks & Spencer responded by excluding Uzbek cotton from their supply chains or agreeing to work with the government of Uzbekistan to improve the situation. Last year, global investors wrote to US and Japanese automotive companies about slave labor in their steel supply chains and around half of these companies committed to action on the issue.

Recently in Brazil, local investors followed this issue up by writing to listed Brazilian companies to clean up their supply chains. Investors worked through the PRI to encourage listed companies in Singapore and Hong Kong to improve their corporate governance and transparency in order to qualify for inclusion in the FTSE4Good index.

There are also moves in Indonesia to establish a local implementation of the Emerging Markets Disclosure Project, an investor initiative to ask emerging market companies to produce annual sustainability reports according to the Global Reporting Initiative framework. There is still some way to go, but things are certainly moving in the right direction.

 

Some companies in Indonesia believe more transparency and disclosure can bring potential problems. What would be your advice to these companies?

Some of the most successful companies in the world are also the most transparent. Transparency is an emerging best practice, and Indonesian companies should embrace transparency and good governance in order to attract foreign capital and secure international customers. Sustainability reporting is an internal risk management tool, allowing companies to identify emerging risks and opportunities earlier than they otherwise would.

Reporting can also be an excellent staff and community engagement tool. Malaysia has a number of companies that produce high quality sustainability reports in line with the Global Reporting Initiative. I’m sure Indonesian companies can do as well.

 

What are the plans for promoting wider adoption of PRI in Indonesia in the coming 12 to 18 months?

There is certainly some momentum in Indonesia now on responsible investment. The Kehati IDX SRI Index is a great development and there is strong interest in the Emerging Markets Disclosure Project, which is being supported by the PRI Secretariat.

Indonesia is a hugely important country in terms of sustainability and governance. The PRI Secretariat would like to work with the IDX and our signatories to host a number of events and meetings to build support for the PRI and responsible investment.

Now is the perfect time for Indonesia to take on the responsible investment agenda.

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