In a two-part article Profs. Paulo D. Branco and Aron Belinky, FGV-EAESP, explain the high-scoring reputation of Brazil in ethical investment.

Brazil and sustainable investment. By Tom Gamble

Pioneering the sustainability index in South America

Brazil has long-been a pioneer in sustainability indexing in South America and among developing countries with the first ISE portfolio, the Corporate Sustainability Index of the Brazilian stock exchange, launched on December 1^st, 2005. Since then, it has been renewed annually, the current portfolio of companies being its 13^th in a row.  However, the roots of the process go back farther to June 2003, when the first talks at Bovespa – the name of Sao Paulo Stock Exchange at that time, now part of a bigger company called B3 – took place. Originally an initiative sparked by ABN Amro Real, a bank that in the early 2000s pioneered the creation of ethical funds in Brazil, at that time seeking a CSR-related fund to benchmark its performance, this launched a series of discussions which resulted in the creation of ISE. *

We make the case that the pioneering role of ISE was actually a result of a larger movement that was happening in Brazil when a number of social-environmental initiatives from the private sector were championed by a generation of business leaders, mostly concentrated in organizations such as Instituto Ethos, Fundação Abrinq, GIFE (Group of Companies, Institutes and Foundations), IBGC –  the Brazilian Institute for Corporate Governance – and CEBDS (the Brazilian chapter of WBCSD). Among many other events and processes, the reasons explaining why these groups and leaders first appear can be tracked back to the re-democratization of Brazil in the late 1980’s, the subsequent Rio Conference in 1992, the creation of the Millennium Development Goals in year 2000 and the Rio+20 in 2012. Moreover, the modernization of Brazil’s capital market and banking system also played a key role in the context.

As such, the ISE has deep roots in participatory, democratic and sustainability values which still today make its methodology and agenda truly unique in global terms. Despite recent backlashes opposing such values in some countries, including Brazil, we still have a very significant set of business-sector players – articulated with civil society, academia and governmental sectors – that strive to keep the agenda and move it forward. For all we can see, ISE will still be a pioneer and an innovator when it comes to championing and disseminating sustainability in the private sector – this with a modern and motivating vision of the future combined with an effective focus on business strategies and practices.

Brazil versus rest-of-world

Thanks to broad global consensus on the corporate sustainability agenda, most stock exchange sustainability indexes focus on essentially the same aspects, in line with what has been explicitly or tacitly agreed in instruments such as Agenda 2030 and its SDGs (Sustainable Development Goals), ISO 26000, the Paris Agreement, and GRI (Global Reporting Initiative) standards to name but a few. On the other hand, there are several differences regarding methodologies and ways of working between what ISE does and the rest of the world. Without entering into details about other specific indexes, it is possible to highlight several main characteristics of the ISE, and point out how they differ from those of other indexes.

We must first clarify that ISE is not a measure of a single company’s sustainability performance: it is the indicator of the evolution of the value of a portfolio composed by shares of companies selected on the basis of how well they incorporate sustainability in their strategies, policies and practices. This assessment is founded on a broad, self-declaratory voluntary questionnaire, and analyzed in both absolute and relative terms. Only companies willing to engage in the selection process answer the questionnaire and are assessed.

A very important feature of the ISE’s questionnaire is that it is continuously improved and updated through public debate with the wide participation of companies, their stakeholders, and other parties interested in the issues of corporate sustainability. This not only ensures that the agenda remains valid, but also the expectations about what companies should do.

Unlike the ISE, many other indexes start by screening listed companies based on their own frameworks and attributing a score to each company together with its supporting evidence. Companies are then invited to complement this initial assessment which leads to a final score and then to the decision to include or not the company’s papers in the index portfolio. Both ISE’s and other approaches have their merits, and we believe that for smaller markets like the Brazilian stock market an approach such as the ISE is more feasible and more likely to engage companies.

Likewise, in ISE’s selection process, a qualitative documental check is performed on a random sample of each company’s answers so as to provide an indicator of how credible their general answers are likely to be. Companies with bad performance in this verification process are less likely to be selected to the portfolio. The individual answers of each company are published, enabling public scrutiny of what they declare to occur. Questioning by stakeholders about the veracity of such answers may also play against the permanence of a company in ISE’s portfolio. This aspect of transparency is also key to ISE’s success and differentiation.

Another important aspect is that ISE’s selection methodology is not a purely mathematical algorithm: the whole process keeps track of each company’s performance in seven different sustainability dimensions, thereby allowing a multi-perspective view. As such, bad performance in one dimension won’t be compensated by good scores in other. Finally, all this information is submitted to thorough debate on the ISE’s Deliberative Board whose members are made up of representatives of 11 institutions and organizations firmly rooted in different sectors related to ISE’s agenda, such as associations of stock market and investment players, CSR organizations, governments and financial institutions.

*Details of the story of ISE can be found in a bilingual book celebrating ISE’s 5^th anniversary, ISE – sustentabilidade : no Mercado de capitas

Read Part 2 of this article.

Useful links:

• Link up with authors Prof. Paulo Branco and Aron Belinky on LinkedIn
• Read a related article: Base-of-the-Pyramid DNA: Companies and the Common Good in Brazil
• 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

• Website: www.council-business-society.org
• Twitter: @The_CoBS
• LinkedIn: 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.  

In 2020, member schools now number 7, 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
• Trinity Business School, Trinity College Dublin, Ireland
• Warwick Business School, United Kingdom.