Brazil has been in the vanguard of ethical and sustainable investment with the rise of the ISE Index. Professors Aron Belinky and Paulo D. Branco , FGV-EAESP, explore the high-scoring reputation of the country and take a look at the challenges and improvements to make for a brighter, more sustainability-conscious future
Ethical investment in Brazil and the Development of the ISE Sustainability Index, by Tom Gamble. Related research: ISE – sustentabilidade : no Mercado de capitas, with Professors Paula D. Branco and Aron Belinky, FGV-EAESP.
A pioneering sustainability index in South America
Brazil has been a pioneer in sustainability indexing in South America and among developing countries and the first ISE portfolio (Corporate Sustainability Index of the Brazilian stock exchange) was launched on December 1st 2005. Since then, it has been renewed annually, the current portfolio being its 13th in a row. However, the roots of the process go back June 2003, when the first conversations at Bovespa – the name of Sao Paulo Stock Exchange at that time, now part of a bigger company called B3 – took place, an initiative sparked by ABN Amro Real, a bank that in the early 2000s pioneered the creation of ethical funds in Brazil, and which was seeking a CSR-related fund to benchmark its performance. This started a series of discussion 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 at that time, 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 (acronym for Group of Companies, Institutes and Foundations), IBGC – the Brazilian Institute for Corporate Governance – and CEBDS (the Brazilian chapter of WBCSD). 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, and passing by the Rio Conference in 1992, the creation of the Millennium Development Goals in year 2000 and the Rio+20 in 2012, among many other events and processes. Moreover, the modernization of Brazil’s capital market and banking system also played a very important 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 champion and disseminate 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, the UK and the USA
Thanks to a 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, GRI (Global Reporting Initiative) standards to name but a few of the most important. On the other hand, there are several differences regarding methodologies and ways of working. 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 and based on 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 and their stakeholders. This ensures that not only 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 first 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 such as the Brazilian stock market an approach such as the ISE is more feasible and 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.
And finally, 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 finally submitted to thorough debate at the ISE’s Deliberative Board, integrated by representatives of 11 institutions/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.
The road is long, the cause is good
Setting up ISE and keeping it running for almost 15 years has been a challenge in many aspects. 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, we see the most challenging aspects as having been 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 scepticism 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 of FGV and of the team was able to gather and harness was essential. To share our lesson, we would say that credibility was indeed very important but that the real, 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 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 to design and implement a sustainability strategy and an action plan.
A 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 pension funds of religions 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 somehow already present – environment. 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 those who are too attached to their past and current assets and advantages, regardless how incompatible with the new environment they might be.
Divestment from carbon-intensive portfolios, getting read 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.
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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.
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