Socially Responsible Investment

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Socially Responsible Investment Emerging
Markets

• Chetan J. Parikh
• Jeetay Investments Pvt Ltd

www.jeetay.com
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Investment rationale for socially responsible
investing

• Evaluating a companys environmental and social
  impact in addition to its financial performance
  provides an additional hedge against risk
• Socially responsible companies offer long-term
  value

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• Is it reasonable to apply socially responsible
  investing methodologies from the developed world
  to emerging markets?

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Global reporting initiative March 1999 exposure
draft. Illustrative application of themes to
major dimensions of sustainability.
Source The Coalition for Environmentally
Responsible Economies (CERES)
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Source The Coalition for Environmentally
Responsible Economies (CERES)
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Source The Coalition for Environmentally
Responsible Economies (CERES)
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Source The Coalition for Environmentally
Responsible Economies (CERES)
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Source The Coalition for Environmentally
Responsible Economies (CERES)
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Source The Coalition for Environmentally
Responsible Economies (CERES)
www.jeetay.com
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Are emerging markets limited and lacking
transparency?

• Emerging markets experience
• economic instability
• weak legal infrastructure
• weak regulatory enforcement
• unpredictable government involvement

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• In the UK, elders talked of public censure
  for companies ignoring the code. Can such polite
  nudging work in India where corporate piracy has
  been the norm, not the exception?
•   - Face Value author, Debashis Basu

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• Fredrick Hayek explained why corporations
  cannot be permitted to define their role in
  society beyond that permitted by law.

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So long as the management has the one overriding
duty if administering the resources under its
control as trustees for the shareholders and for
their benefit, its hands are largely tied and it
will have no arbitrary power to benefit from this
or that particular interest. But once the
management if a big enterprise is regarded as not
only entitled but even obliged to consider in its
decisions whatever is regarded as the public or
social interest, or to support good causes and
generally to act for the public benefit, it gains
indeed an uncontrollable power - a power which
could not long be left in the hands if private
managers but would inevitably be made the subject
of increasing public control.
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David Engel found only three permissible
corporate activities beyond profit maximization.

• obey the law
• inform the public about the corporations impact
  on society
• minimize corporate involvement in politics
• - An approach to Corporate Social
  Responsibility, Stanford Law Review (1970)
  

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• Would this definition be considered
  insufficiently rigorous to meet the definition of
  social responsibility? Are there varying
  definitions of social responsibility depending on
  cultural factors?

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• There has been a lack of high profile funds
  investing in socially responsible companies and
  limited long-term performance data in emerging
  markets.
• However there is inconclusive interpretation
  of returns in the short-term in developed
  markets.

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• In 2003, 67 of the 52 screened U.S. funds
  tracked by SIF earned the highest ratings for
  performance from Lipper and/or Morningstar.
• A Morgan Stanley study found that sustainability
  leaders in the MSCI World Index financially
  outperformed sustainability laggards over the
  past 4 years.
• A Wharton School study found that SRI mutual
  funds underperformed portfolios representing a
  broader fund universe.
• A study of 103 German, US, and UK SRI mutual
  funds found no significant difference between
  their returns and those of unscreened funds
• Sources SIF, 2003 www.sri-advisor.com
  www.sristudies.org

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• There is negligible independent oversight in
  emerging markets. In India, enormous power rests
  with a few financial institutions. They have
  usually acted only in their own interest.

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Is socially responsible investing congruent with
long-term value investing?

• Not Necessarily

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Key to successful long-term investing

• Moats
• Management
• Margin of safety

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Evaluating management

• Compensation
• Character
• Operations

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Compensation

• Does management pay itself for performance?

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Character

• Were executives given loans that were
  subsequently forgiven?
• Do executives get perks paid for by the company
  that they should really be paying for themselves?
  
• Does management use stock options excessively?
• Does management use its position to enrich
  friends and relatives?
• How independent are independent directors?
• Is management candid about its mistakes?
• Is high quality talent being retained?

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Thank you

• www.jeetay.com