See You at SRI in the Rockies!”

How does your garden grow? Nurturing Growth in Emerging Markets

“See You at SRI in the Rockies!”

Among people involved even peripherally in SRI, that’s become a standard parting.  No conference matches its combination of professional ‘must attends’ and just plain fun.  Someone once described it as like a family reunion but of people you like.

SRIR is also a time for announcing new products and services.

This year, KLD will make two sponsored presentations (on Sunday night) to highlight new products incorporating its indexes.  Don’t miss them!  At our booth, we’ll have news on research innovations and new alliances to serve investors better. 

We’ll also have at the booth something unique to take home with you.

See you at SRI in the Rockies!

How does your garden grow?
Nurturing Growth in Emerging Markets

By: Celeste Cole

Tending the Garden: KLD’s Emerging Markets Coverage

KLD Consulting has, for many years now, been engaged in the interesting, and sometimes surprising world of emerging markets research.

KLD’s research starts with a thorough investigation of country-relevant data, such as that published by Freedom House, Verite and the U.S. Department of State, to gain an understanding of the broader country context in which the companies operate.

KLD then identifies and reports on breaches of internationally recognized global conventions and norms, including the ILO core labor conventions and the Global Sullivan Principles. Our research consequently casts a wide net and addresses such issues as governance, anti-competitive behavior, environmental issues, human rights and the whole gamut of employment issues (working conditions, union recognition, health and safety; etc.).

Internally, KLD has also begun to analyze emerging market companies’ positive actions towards good corporate citizenship, as typified by policies, management systems and reporting that addresses a company’s key environmental, social and governance (ESG) risks.

The output of KLD’s emerging markets research framework is a comprehensive, continually updated, analysis of corporate performance, and a recommended rating on which the client can base his or her investment decision.

Weeds and Other Obstacles: The Challenges of Emerging Markets Research

The challenges involved in uncovering and analyzing ESG issues in emerging markets are many, not least being a lack of publicly disclosed data. Many emerging market companies are in the very early stages of grappling with how to implement ESG policies and management systems, and reporting consequently lags behind.

The largest companies (frequently the companies that have the biggest impacts) may have better reporting compared to peers, but this reporting may still appear rudimentary by developed market standards.

In addition, it is also essential to understand the stage of development of CSR within a country context and analyze companies accordingly. India, Israel and South Africa are further along the learning curve than Kazakhstan, Thailand or the Philippines, for example, and we find differing levels of ESG transparency and disclosure from companies within these countries.

Other issues KLD addresses include freedom of the press, with media reports varying in their level of clarity and detail. Countries such as the Czech Republic, China and Russia have notably poor performance.

While various stakeholders will often monitor events or incidents that have a significant impact, in some circumstances media, government and non-governmental organization reports may vary in small details.

KLD has successfully addressed these key challenges by adopting a parallel approach for emerging markets research that it has used for researching U.S. companies.

KLD has assumed a strategy of structuring its emerging markets ratings to take advantage of the data that is available, while also taking a multi-stakeholder view of company performance. By doing this, KLD developed a process that does not depend solely on the input or cooperation of the companies being analyzed.

This is not to say that company input is not desired or requested. In fact, we contact all companies covered to learn more about their policies and practices. KLD simply believes that a wide variety of sources of information, including NGO, media and governmental sources, will build the most accurate picture of company performance possible.

Sowing the seeds of future sustainable development: How the IFC Aims to Help

In September 2006, The International Finance Corporation (IFC), the private arm of the World Bank, awarded a $500,000 grant to Standard & Poor’s (S&P), KLD and CRISIL, one of India’s leading research and ratings companies; and to Trucost and CLSA, the winners of its research competition, "Capturing Value.”

Rachel Kyte, Director of IFC’s Environment and Social Development Department describes the aim of the grant succinctly: “hoping to break a chicken-and-egg situation where investors will not invest in emerging markets for lack of information, and research providers will not enter the market for lack of demand.”

The grant provides the funding to build emerging markets ESG research capacity with local market knowledge and expertise.  S&P and KLD Consulting will share their considerable experience in ESG indexes, ratings and research.  CRISIL can combine this knowledge with its understanding of the unique challenges of operating in the Indian market.  CRISIL’s relationships with, and ability to gather data from, Indian companies will further enhance the quality of the research.
 
The S&P/KLD/CRISIL team has three aims.
 

• The first is to provide investors in emerging markets equities with better research on corporate ESG performance. 

• The second is to facilitate high-quality, long-term investment in emerging markets from pension funds and other investors worldwide through an Indian equities index and related ESG research on companies in India. 

• Finally, it is the hope of the team that what gets measured gets done.  We expect that by conducting the analysis, creating the index, and constructing a vehicle for investors, that we will send a signal to emerging market firms that appropriately managing ESG risks and opportunities is a requirement for investors, increasing pressure on companies to achieve greater ESG performance.

In this way the S&P/KLD/CRISIL partnership hopes to encourage investment in emerging markets by channeling funds to corporations who are good corporate citizens.