Washington DC, October 21, 2003
-- Socially responsible investment (SRI), has evolved over the past thirty years from a limited movement advocating morally informed investment into an international industry with over $27 trillion in assets. But to date, it remains largely a phenomenon of the developed countries, and it has been slow to make inroads into emerging market countries, where the potential to guide and boost private capital flows to sustainable development is significant.
Towards Sustainable and Responsible Investment in Emerging Markets
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a report commissioned by the International Finance Corporation, the private sector arm of the World Bank, and released at the UNEP Financial Institution Roundtable in Tokyo, provides the first comprehensive overview of socially responsible investment as a tool for sustainable development in emerging markets. Drawing on a wide range of data, it provides an inventory of SRI investment in emerging market securities, identifying barriers to SRI growth and opportunities for overcoming them.
In developed countries, including the United States, United Kingdom, and Japan, the growth of SRI has accelerated in recent years, and this trend is likely to continue. But SRI held in emerging market assets, currently an estimated $2.7 billion, represents only about 0.1% of all SRI worldwide. Of this, some $1.5 billion is held by developed country investors and about $1.2 billion by emerging market investors.
In emerging markets it is difficult to gauge the demand for SRI, due to a lack of rigorous market studies. In interviews conducted for the report, 12 U.S.- based social investment professionals estimated that total demand for emerging market asset types totals between $500 and $700 million. For investors located in the emerging markets there is less data available, and the indications are mixed. But the rapid growth of SRI in Brazil, South Africa, and to a lesser extent in Asia, shows the potential for SRI in relatively large and sophisticated emerging markets.
The report points out that for social investors in emerging markets, the foremost barrier—aside from direct financial obstacles and analytical challenges—is the lack of credible, standardized data on business practices related to social and environmental concerns. A key and immediate impact of SRI, is in fact, its effect on the production and disclosure of corporate social and environmental information. This information can help improve long-term economic competitiveness by positively influencing corporate behavior and governance
The report finds that SRI in emerging markets makes business sense. Companies in emerging markets have recognized that corporate social and environmental responsibility enhances long-term profitability and can add financial value. Recently, 16 leading banks from nine countries announced the adoption of the Equator Principles, a voluntary set of guidelines for managing social and environmental issues related to the financing of development projects. The banks will apply the principles globally to loans for projects with a capital cost of $50 million or more, in all industry sectors. In adopting the principles, banks are recognizing their role in mitigating environmental and social risk. They are choosing to provide loans only to projects whose sponsors can demonstrate their ability and willingness to comply with processes aimed at ensuring that projects are developed in a socially responsible manner and according to sound environmental management practices.
The report concludes that SRI can contribute positively to socially and environmental sustainable development in emerging markets—and that such investing can be done profitably. While rapid growth of SRI in emerging markets is unlikely in the short term, growth prospects appear solid over the medium and long term, particularly among institutional investors in emerging as well as developed markets. Given current market conditions and the real and perceived barriers to entry, however, mobilizing more SRI in emerging markets is not a simple undertaking. To anticipate stronger future growth, it should be a priority to create a solid infrastructure for SRI in these markets.
IFC's Sustainable Financial Markets Facility, a donor-funded technical assistance program, has collaborated with the authors, Enterprising Solutions Global Consulting, to assess the potential for socially responsible investment in emerging markets and bring the findings to a wider audience. IFC is in a unique position to support the future mainstreaming and development of emerging market SRI, and the research undertaken for this report constitutes a significant step forward. Funding by the governments of the Netherlands, Norway, and Switzerland has enabled this important work.
The mission of IFC is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY03, IFC has committed more than $37 billion of its own funds and arranged $22 billion in syndications for 2,990 companies in 140 developing countries. IFC's worldwide committed portfolio as of FY03 was $16.7 billion for its own account and $6.6 billion held for participants in loan syndications.
