Can Financial Markets Push for CSR? Part 1

Those in advanced and developed industrial countries may be tempted to view emerging markets as irresponsible producers of pollution and a culprit for much of the world’s global warming. But research on South America by Prof. Adrian Zicari of ESSEC Business School reveals a surge in local-specific sustainability indexes for investors seeking a clearer picture of firms’ responsible business practices.

Can Financial Markets Push for CSR? Part 1 by Tom Gamble.

Fact and fog, smug and smog

It’s a fact – things are getting better. Doom-laden prime-time TV reports of industrial pollution and global warming apart, social responsible investing and sustainability indexing are two clear examples of a tangible effort to make things go in the right direction. Across the world, they are surging.

Socially responsible investing (SRI), sometimes known as green or ethical investing, is all about gaining financial return while seeking to invest in firms demonstrating a conscious effort to improve their impact on business, society and the environment.

For an investor to make that decision to place his money wisely – and responsibly – he needs to know what a firm is actually doing in terms of responsible business practice and how it performs. This is where the sustainability index comes in – stocks quoted in terms of environmental, social or governance (ESG) criteria.

Such indexes have been around for some time in industrialised and developed economies, encouraged by the UN Global Impact initiative of 1999. The US Dow Jones Sustainability Index (DJSI) or the London-based stock market FTSEGood index, respectively launched in 1999 and 2001, are good examples that some make use of to point a condemning finger at stock markets in developing or emerging economies without such indexes.

Such moralising from the world’s richest may not be entirely justified – firstly because their own emergence tended to occur at a mature stage of the market. And secondly because, in a global context of increasing reference to sustainability indexes for investor decisions, some developing markets are attempting to make good.

They are doing this via the launch of indexes that tailor to local contexts as well as solving the challenges of their comparative low market liquidity and the high cost to the potential investor of obtaining correct and proven information needed for their investment decisions. Such an example is Latin America, and more specifically Brazil, Mexico and Chile, the focus of detailed research on SRI by Prof. Adrian Zicari of ESSEC Business School.

A clean sleight

Prof. Zicari points to SRI developing in Latin America in a different way from those of developed markets, with Brazil, Mexico and Chile providing an approach that could prove interesting for other emerging countries either in the region or elsewhere in the world.

As Prof. Zicari states, this ongoing surge of Sustainability Indices in three Latin American markets is remarkable. SRI is still quite new in the region, the situation largely contrasting with that of developed markets where SRI has become a common investment practice. One sixth of funds invested by professional managers in the United States, for example, is related to some approach of SRI (US SIF, 2014).

What sets the Latin American approach apart is the direct participation of local stock exchanges that aim to gather a critical mass of highly respected stakeholders. This has mainly come about through a combination of two factors – the limited nature of stock exchanges in South America and the cost of obtaining ESG data.

In developed markets, this assessment data is collected by investment funds or by social rating agencies which makes the cost of obtaining it high for investors in developing countries. By using indexes created by their local stock markets and whose composition is freely distributed so that any investor can use the information at no cost, Brazil, Mexico and Chile have creatively detoured this onerous aspect.

Adrian Zicari, Council on Business & Society
Adrian Zicari

Useful links:

Read Part 2 of Adrian Zicari’s article Can Financial markets Push for CSR?

Learn more about the Council on Business & Society

The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

Member schools are all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.

The Council on Business & Society member schools:
- Asia-Pacific: Keio Business School, Japan; School of Management Fudan University; China; ESSEC Business School Asia-Pacific, Singapore.
- Europe: ESSEC Business School, France; IE Business School, Spain; Trinity Business School, Ireland; Warwick Business School, United Kingdom.
- Africa: Stellenbosch Business School, South Africa; ESSEC Africa, Morocco. 
- South America: FGV-EAESP, Brazil.

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