In Part 2 of their article on the ISE sustainability index in Brazil, Profs. Paulo D. Branco and Aron Belinky, FGV-EAESP, take a look at the challenges and improvements to make for a brighter, more sustainability-conscious future in the form of sustainable investment.
Brazil and Sustainable Investment by Tom Gamble.
Of skepticism, trust, and good intent
In many aspects, setting up ISE – the Corporate Sustainability Index of the Brazilian stock exchange – and keeping it running for almost 15 years has been a challenge. Although there were interesting technical obstacles to overcome regarding the scoring methodology, creating the algorithm for the selecting process and the IT system to support the whole thing, the most challenging aspects for us were the negotiation of the questionnaire structure and content, and the commitment of companies and other stakeholders – all of these being processes that actually happened in close relation with each other. The main obstacles were the skepticism of many actors, and for different reasons.
For some, especially NGOs and labor organizations, the risk of greenwashing was far too big, and trust in the selection process wasn’t something that could be taken for granted. For others, such as less engaged or excessively pragmatic market and corporate players, the whole thing seemed to be a time-consuming and focus-dispersing adventure, that could even trigger unnecessary friction with stakeholders that would otherwise remain traditionally immobile.
To solve such deadlock, the credibility that FGV and the team was able to gather and harness was essential. In addition, while credibility was indeed very important, the really crucial aspect for success was the transparency and adherence to a clear, open and well-intended process. It was only by this that it was possible to create the essential trust and dialogue required to build a common agenda and the collective deep-rooted process that supports ISE.
Playing in the big league
Regarding the impact of ISE, there is unfortunately no formal assessment to show but there is much evidence that it has relevant impact both to companies, at individual level, and to broader society and the market. This includes for instance, the fluctuations in companies’ share values that coincides with their presence or absence in the ISE portfolio, or the actions and words of high level executives and their staff regarding such situations as well as specific aspects of company performance. It is also telling evidence that ISE is frequently mentioned – by companies, practitioners, academia, media and governmental bodies – as a reference for the business sustainability agenda.
To date, more than 170 companies have participated in the selection process of the ISE, and only about 70 of those have been in its portfolio for at least a year. Moreover, besides the possibility to be part of the ISE’s sustainable investment portfolio, participating in the selection process is in itself an extraordinary opportunity for self-assessment, diagnosis and planning for the overwhelming majority of these companies.
Based on the structure of the ISE questionnaire that attempts to evaluate the existence of policies, processes, practices and metrics, participating companies can identify strengths and weakness that help them design and implement a sustainability strategy and an action plan.
Sustainable Investment: Aiming for the brighter future
Although “ethical investment” may be a term used by many, we believe it is not the best term to describe what ISE and other similar indexes are about. “Ethical” conveys the idea of a moral judgement of certain sectors and types of business, and while this can be the case of investors such as the pension funds of religious institutions – indeed, there is nothing wrong with that – the term cannot apply to many others and, as we see, might constitute a lower potential for mainstreaming and scaling up.
This being said, it would be good news if people were able to bring an ethical dimension into their decision-making processes and daily lives. However, there are stronger and less controversial arguments to voice if we look to the terms “sustainable investment” or “responsible”, or “green”, or even “social investment”. The argument here is essentially based on the idea that we are in the throes of a rapid transition to an entirely different business environment triggered by a combination of technological, environmental, cultural and demographic transformations. Companies that have succeeded in the not-so-distant past may not survive in the coming – and in some ways already present – environment.
For us, this is the emerging profile of sustainable investment: not just looking at companies that do good, but rather trying to sort out those who are catching up with the transition – and thus contributing to a fairer and more sustainable world – and those who are lagging behind, unable or unwilling to update their businesses; or, additionally, those who are too attached to their past and current assets and advantages, regardless of how incompatible with the new environment they might be.
Divestment from carbon-intensive portfolios, getting rid of stranded assets and searching for innovative positive-impacting emerging businesses are clear signs of how investors are reacting to this situation. That’s why, far from a passing fashion, we trust we are talking about a near and brighter future.
Read Part 1 of this article
Useful links:
- Link up with authors Prof. Paulo Branco and Aron Belinky on LinkedIn
- Visit the FGVces website and discover the Center for Sustainability Studies’ various initiatives and projects
- Discover FGV-EAESP
- Browse FGV-EAESP’s Master’s, MBA and EMBA programmes on the Council on Business & Society website
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.
- ESSEC Business School, France-Singapore-Morocco
- FGV-EAESP, Brazil
- School of Management Fudan University, China
- IE Business School, Spain
- Keio Business School, Japan
- Stellenbosch Business School, South Africa
- Trinity Business School, Trinity College Dublin, Ireland
- Warwick Business School, United Kingdom.
