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SRI research gets boost

May 2006

An initiative to provide investors in emerging market equities with better research on the social, environmental and governance performance of companies has been set up by the International Finance Corporation.

The World Bank’s private sector arm will give research bodies, rating agencies, index providers and others a total of $500,000 (£285,000) in grants for ‘new information services geared to sustainable and responsible investment in developing country firms’.

The IFC hopes the programme will improve the flow of information on the companies and therefore ‘facilitate an increase in high-quality, long-term investment in emerging markets’ from pension funds and other investors. Broadly defined, socially responsible investments are worth about $2.7trillion globally, but IFC-commissioned research found in 2003 that only 0.1 per cent of this is invested directly in emerging market listed equities.

‘We know that more and more investors are keen to invest in the emerging markets, but there is little reliable information on how emerging market companies perform against such criteria,’ said Rachel Kyte, director of IFC’s environment and social development department. ‘The research infrastructure is just not in place to encourage socially responsible investment in the emerging market asset class.’

A further difficulty is the ownership structure of listed Asian companies, with many of the largest controlled by families. Disclosure of operational risks in the region is also very low. A 228 page study published last month by the Association for Sustainable and Responsible Investment in Asia described disclosure levels in the eight industry sectors it analysed as poor. ‘Asian equity markets will struggle to value environmental, social and governance issues until both government and corporate disclosure norms are improved’, Asria said.

The IFC is offering grants to mainstream sell-side analysts and niche SRI data providers. ‘The idea is to challenge the market to come up with commercial ideas on the best way to provide good research,’ said Kyte. Successful applicants will be announced at the end of September. They will be chosen by a panel of representatives from the United Nations Global Compact, First State Investments, the World Resources Institute, the World Federation of Exchanges, Asria, and the Switzerland-based OnValues investment consultancy. Funding is provided by the IFC and governments via the IFC’s Sustainable Financial Markets Facility.

The programme builds on the IFC’s work with the Sao Paolo stock exchange to create a sustainability index for the Brazilian market (EP7, issue 10, p5). The IFC said that at this stage there were no plans to make a further round of grants next year.

A mainstream investor network that encourages sell-side SRI research has just admitted its first North American members. The CPP Investment Board, which has $80billion under management and invests funds on behalf of the Canada Pension Plan, has joined the Enhanced Analytics Initiative, along with US-based Calvert, which manages more than $11.8bn. This has increased the value of the assets managed by members of the network to $920bn (EP6, issue 7, p5).



Further Information
http://www.ifc.org/ifcext/enviro.nsf/content/sfmf_rfp_emergingmarketequities
http://www.asria.org
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