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A Change Fusion – CSR Asia working concept paper on

Establishing socially responsible investment (SRI) criteria in Thailand:


Background and standard criteria comparison

First draft 3.11.08 (internal document)

Overview, global & regional development

Socially Responsible Investing (SRI) also known as sustainable investing or ethical investing,
describes an investment strategy which seeks to maximize financial return using additional
investment criteria that falls outside the traditional financial appraisal model. SRI allows investors
to take account of wider concerns and encompasses a wide range of corporate best practices for
environmental, social and governance factors (ESG).

Led by institutional investors, asset and fund managers are increasingly informed on ESG criteria
and are starting to realise that SRI is not just about incorporating additional values into decision
making. An SRI focus is also about hedging against the downside of globalisation, long term
stability and performance and sourcing additional returns. This has been sharply brought to light
with the current financial turmoil and macro trends such as climate change and the instability of
fuel costs coupled with dwindling supplies.

Whilst Corporate Social Responsibility (CSR) is a now a more mainstream term used by many
organisations, a recent survey by AXA Investment Managers and AQ Research of over 350 global
investment professionals, found that ‘ESG’ and ‘sustainability’ has emerged as preferred terms
associated with the SRI field from a selection of 14 other choices.

SRI is applicable to many types of financial products, but in practice it is mostly applied to stocks
(equity securities). The quantification of ESG performance in the U.S. and in Europe is increasingly
professionalised using a combination of resources such as;

• Specialised rating agencies provide ESG analysis to the market


• More and more financial companies set up their own SRI analysis departments
• Market indices such as the Dow Jones Sustainability Index (DJSI) or FTSE4Good, supply
fund managers with dedicated investment universes where selection for an index is based
both on financial and non-financial performance.
• The development and growth of the United Nations Principles for Responsible Investment
(UNPRI)
• NGOs provide their own expertise and assessment of issues and corporation, for example
Oxfam has recently looked at the ESG performance of companies listed on the Hong Kong
Stock Exchange.

Depending on the fund’s orientation and commercial scope, each asset owner/manager who is
using ESG criteria in their investment appraisal process, relies on a combination of these
resources to pick stocks for inclusion in that institution or fund’s investment universe.

Global SRI
SRI has experienced high growth in both the United States and Europe. In the US SRI has
outperformed the broader universe of all investment assets under professional management. It is
estimated that 11 percent of assets under professional management in the US (or nearly one out of
every nine dollars) distributed across 246 funds now have some form of SRI criteria associated
with them. In fact, SRI assets rose more than 324 percent from US$639 billion in 1995 to US$2.71
trillion in 2007 while the broader universe of assets under professional management experienced a
growth of 260 percent from US$7 trillion to $25.1 trillion. During 2005-2007, SRI assets increase
more than 18 percent while the broader universe increased less than 3 percents.1 In Europe, SRI
has also been on a continuous upward growing cruve; the market grew from €1 trillion in 2005 to
€1.6 trillion in 2007 distributed across 451 SRI funds in Europe.2 In South Africa alone, SRI flow
invested in 21 SRI funds amounted to US$1.6 billion.

Watson Wyatt recently launched Defining Moments, a research publication that describes a
radically changing investment landscape that presents both problems and opportunities for
investors. It identifies several macro trends that are likely to be well established by 2020. These
include the growing impact of environmental, social, and governance considerations both as
indirect sustainable performance influences and as desirable end attributes in their own right.

SRI in Asia
SRI has gained a significant foothold in emerging markets. Roughly US$32.2 billion was invested
in more than 235 SRI mutual funds (Unit Trusts) in Asia.3 Below are classification of funds and
investment flow to SRI in Asia Pacific region.

Total Number of SRI Funds in Asia (including US$


faith-based funds): 243 Country (million)
Public Private SRI Faith- Country Australia 16,900
Funds Equity Pension based1 Total2 China 325
Mandates Hong Kong 274
China 2 0 0 0 2 Japan 3,131
Hong Malaysia 14
Kong 19 0 0 1 20 Multi-Country 1,034
Japan 59 1 0 0 60 New Zealand 852
Korea 37 2 6 0 45 Singapore 125
Taiwan 3 0 0 0 3 South Korea 1,321
Singapore 3 1 0 10 14 23,976
Malaysia 2 0 0 81 83 Private Equity
Indonesia 0 1 0 1 2 Fund 226
India 1 1 0 1 3 SRI Mandates 8,110
Thailand 2 0 0 1 3 Total Private
Segment Equity & SRI
Total 128 6 6 95 235 Mandates 8,335
No. of SRI Funds by Country: 235
Asia Hedge Funds: 8

Association for Sustainable and Responsible Investment in Asia (ASrIA),

More developed markets such as Japan, Korea and Hong Kong have the highest number of funds
while new players such as Taiwan, India and Thailand have fewer options available. In Malaysia on
the other hand, the majority of assets are set around faith based SRI funds.

Most SRI fund’s benchmark are constructed using ESG factors as selection criteria. Some funds
advocate to a single cause, pure-plays, while others employ combination of causes including;
clean and renewable energy, environmental friendly management, workplace practices and labour
standards, ethical policies, corporate governance and transparency.

1
Social Investment Forum Foundation, 2007
2
Celent financial Consultancy, 2007
3
ASrIA 2008
Asset Allocation
Equities form the majority asset class employed by
Asset Class % investors, followed by debt instruments such as
Equity 46 bonds. A survey conducted by Eurosif 1 indicates
Bonds 13 that 46% of the investment in European SRIs is in
Venture Capital/Private the form of equity investment while 13% of the
Equity 13 investment is in bonds. As investors become more
Alternative/Hedge Fund 9 open to the alternative investment options, venture
Real Estate/Property 5 capital investment has also begun to gain ground in
Monetary Deposit 4 the SRI investment space.
Commodities 4
Microfinance 6
Eurosif, 2008

As shown in the table, investment flow that go into venture capital or private equity weights as high
as bonds. In the U.S. an estimated of US$5.3 billion in capital was identified under the
management of socially or environmentally screened alternative investment vehicles such as social
venture capital, double-and triple-bottom line private equity and hedge funds, typically organised as
unregistered limited partnerships or limited liability companies. Moreover, an estimated US$26
billion went into community investing institutions that directed capital to communities underserved
by traditional financial services.

Nevertheless, investors still invest mainly in large caps while the share of small and medium caps
is quite insignificant. This is largely due to the lack of appropriate ESG data available to offer
financial products from companies in the small and medium cap sector. In this sense there is a
definite need to develop research capacity and capability to allow small and medium caps to tap
into the potential SRI investment flow.

SRI Indices

A number of SRI indices have developed over the last few years and have concentrated on
tracking listed companies with ESG performance appropriate to their individual criteria.

The eligible universe for SRI index usually lies within common stock indices therefore the
companies are subjected to the ground rules of that particular index as well as additional SRI
criteria which place greater emphasis on ESG standards.

An SRI index can either be sector specific or sector neutral. Sector neutrality actually limits the
financial risk associated with sector bias. In fact, an SRI index and sustainability index are
relatively similar. Well know sustainability indexes in the U.S. and in Europe such as DJSI,
FTSE4Good, Ethibel Sustainability index, Calvert Social index, KLD’s Domini400Social index are
being referred to as both sustainability index and SRI index. Nevertheless, SRI index is created to
cater to a more specific need in term of socially responsible investment.

In Asia, Japan, South Korea and Hong Kong are market leaders in SRI indices . An well planned
and developed SRI index will not only raise the general profile of ESG and SRI among the local
companies but also attract a growing number of SRI investors from overseas. As the market for
SRI in the U.S. and Europe is becoming more developed, SRI investors are continuously looking to
the Asia Pacific region to expand their investment portfolio. However, they are severely limited by
the fact that there is little in the way of high quality research for Asian companies. This is partly
due to a lack of disclosure on the part of companies, but also the fact that ESG research has not
been forthcoming.
Thailand SRI opportunity

To many in the SRI sector, it is clear that even with active engagement from investors, assets
owner and fund manager, they can only go so far in encouraging responsible business strategies
from the corporate world. There is also a role for public policy to address economic externalities

The Stock Exchange of Thailand should try to effectively tap into current global SRI flow and
actively encourage and incentivise the creation of more SRI funds as well an SRI index. This will
involve helping to facilitate both local and foreign players in gaining access to accurate information
as well as providing a positive framework SRI investment in Thailand.

Globally, policy-makers have begun to realise the role that investors and their engagement
strategies can play in encouraging good corporate practices. Especially in the current investment
climate, responsible investment can be used as a policy tool for achieving improved performance
on ESG indicators.

Regional development of SRI has been fast and robust Malaysia and Singapore have just
launched their sustainability index early this year. SET should follow the global trend in order not to
lack behind the regional counterpart.

In order to attract SRI investors, local companies must being to meet globally accepted ESG
standards including environmental performance and measurement of emission, commitments to
employees, supply chain standards and improved governance, ethics and anti-corruption policies.
A company can advance their efforts by producing a sustainability report and complying with
standards such as GRI (Global Reporting Initiative) reporting system indicators.

A great example from Thailand is the Siam Cement Group which has been the country’s leader in
producing sustainability report following GRI guidelines and incorporating ESG factors into its
business strategy and decision making. The company is listed on Down Jones Sustainability Index
and was recently place sixth in the CSR Asia Business Barometer.
Social screening & standard comparison

In realizing Thailand SRI opportunity, the first issue to address is


of social screening criteria standard. Currently a number of
emerging rating indexes which prioritize both economic and social
performance that track and rate the financial performances of
leading sustainability-driven companies. Among them includes
Down Jones Sustainability Indexes (DJSI), FTSE4Good index
series, KLD’s Broad Market Social Index or the Domini 400 and
Calvert Social Index. All are designed to track the performance of
the companies that meet globally recognized corporate
responsibility standards.

Besides Indexes and rating agencies, SRI fund managers perform similar function in identifying
socially and environmentally responsible investment options. When conducting a social screening,
fund manager or the rating agency often rely on

• Negative screening process. This process eliminate companies that produce certain
products such as tobacco and liquors or engage in certain activities which are considered
as unethical to the society such as gambling or military weapons.

• Positive screening process. Most of the leading managers of socially screened funds
also proactively look for positive or “best-in-class” factors as well. Positive screening that
follows essentially rank the remaining companies on a wide range of ESG (environment,
society and governance) factors. Some investors go beyond positive screening by applying
Second-Order Screening. This not only screens out companies that fail to fit the initial
criteria but also screening out companies that conduct business with them.

In fact, the quantification of ESG performance in the U.S. and Europe is


increasingly professionalized using a combination of resources such as
social reporting system (GRI) or sustainability reports, and International
standard for social responsibility such as ISO26000. These reporting and
management standard effectively facilitate the social screening process
as they often provide relevant data with regards to firm’s social and
environmental performance.
The following table compares issues which are used by reporting and management standard as
well as the rating agency.

Sub-Issue GRI ISO DJSI


26000
Environment
Prevention of pollution and careful management of emissions,
effluents, and waste treatment. X X X
Sustainable and efficient resource use and conservation. X X X
The use of alternative renewable and low impact resources. X X X
Protection and restoration of the natural environment
(biodiversity)
X X
Labor practices
Occupational Health and safety X X X
Human development X X X
Diversity and equal opportunity X X X
Employment, labor relations and social protection X X X
Talent attraction and retention X
Human Rights
Discrimination and vulnerable group X X X
Freedom of association and collective bargaining. X X X
Fundamental right at work X X X
Forced and compulsory labor as well as child labor policy X X X
Investment and procurement practice or due diligence X X
Society/Fair Operating Practices
Anti corruption policy X X X
Responsible Political Involvement X X X
Anti-Competitiveness behavior policy X X
Product Responsibility/Consumer issues
Customer health and safety X X
Product and service labeling. X X
Fair marketing and contractual practices. X X
Customer relationship management X
Community involvement and Development.
Community involvement X X X
social investment X X X
responsible investing; incorporate economic, environment, social
and governance issues into investment analysis X X X
measure to improve their social performance X X
Corporate citizenship or Philanthropy X
Governance
Organizational governance that incorporate social responsibility
(including accountability, transparency and ethical code of X X X
conducts) into the decision making process.
Stakeholder engagement that extend to include communities, civil
society, customers, shareholders and providers of capital, X X
suppliers, employees and other workers and their trade.
Mechanism for shareholders and employees to engage in two way
communication with the highest governance body. X X
Linkage between compensation for members of the highest
governance body, seniors, and executives. X X
Mechanism to avoid conflict of interests X X
Corporate Responsibility Monitoring and X
Risks and Crisis Management X
* DJSI criteria employed here derived the which is the most important source of information for the assessment
according to http://www.sustainability-index.com/07_htmle/assessment/infosources.html

The sustainability assessment procedure usually involves the questionnaires which are distributed
to the companies listed on investable stock universe. The responses (singed by a senior company
representative) together with evaluations based on companies documentations will be analyzed
and verified again by independent analysts from the rating agency or research organizations.
Beside the company documentations such as annual report/sustainability report/internal
documentations, reviews on media, press release as well as articles and stakeholder commentary
written about a company over the past year will be examined to further verify the validity of the
responses.

If the companies are to meet all the established criteria and pass the overall screening process,
they will be considered as “socially responsible companies.” These firms will be listed on different
sustainability indexes or be included in the universe of SRI investable stocks and bonds.

In particular, to build a socially screened equity portfolio, the management team will uses a
quantitative model to build an index-like portfolio that selects socially responsible stocks to come
as close as possible to the overall characteristics of the original stock universe (that include firms
who fail to pass the social screening process) by a range of factors, including the level of returns
and risks. Socially screened funds should also track closely to mainstream benchmarks for the
investors to ensure that the fund can fit cleanly into an appropriate asset allocation. Moreover, in
the end, the conventional benchmarks represent the touch stones to which the performance of
socially screened funds will be compared.

In Thailand, as SRI criteria and index are being explored, Change Fusion proposes the following;

• Working guideline development. Financial authorities such as the Stock Exchange of


Thailand (SET), Securities and Exchange Commission (SEC) as well as other related
organizations should form a working group that further explore key SRI criteria such as
those compared in this paper. The short-term goal is to issue a working guideline of SRI
criteria that the listed companies and investment funds could use to begin gather relevant
data for the more formal establishment of SRI criteria and indexes in the near future.

• Partnership between interested mutual fund and research partners. Mutual funds
with strong interest to establish pioneering SRI fund in Thailand could partners with
research organizations (global, regional and local with relevant expertise) in order to
develop a working SRI criteria where research organizations could independently gather
data from targeted listed companies relevant to run against the working SRI criteria.
Through this process, pioneer SRI funds could be developed before the national standard
SRI criteria is formally launched.
Further standard criteria reading list

DJSI www.sustainability-index.com/
FTSE4Good www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp
KLD http://www.kld.com/indexes/ds400index/index.html
ISO26000 www.iso.org/sr
GRI www.globalreporting.org/

Related SRI development reading list

Social Investment Forum http://www.socialinvest.org/


Eurosif http://www.eurosif.org/
Association for Sustainable and Responsible investment in Asia http://www.asria.org/
SRI Asia http://www.sri-asia.com

Working team
Change Fusion, CSR Asia, Sarinee Achavanuntakul

Contact
Narissa Shrestha, Coordinator
narissa@changefusion.org
Change Fusion
444 Olympia Thai Tower, 22nd. Fl., Ratchadaphisek Rd., Samsemnok, Huaykwang,
Bangkok 10310 Thailand.
www.changefusion.org
Tel. +662 938 2636 , +662 513 4192
Fax +662 938 1877

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