Melanie Stern is section editor of Families in Business magazine.
SRI and CSR are big buzzwords in the West, where the ethics of corporates seem largely bereft. Investors in the Far East are warming to the idea, finds Melanie Stern, but the region has its own set of hurdles to overcome
This time last year, Yasuo Takei, founder and chairman of Japanese credit lender Takefuji was found guilty of breaking the country's Telecommunications Business Law by ordering his staff to wiretap the phones of journalists he thought wrote articles criticising his company. Takei was stripped of his chairmanship, faces a jail term, and vultures have already begun circling his company.
But this September, Takefuji was approved as a constituent of FTSE4GOOD Japan, an investible index of 100 Japanese companies thought to be strong players in corporate social responsibility (CSR) with a whopping market capitalisation of US$3.6 trillion.
Takefuji said it saw FTSE's decision as "an appreciation of our long perseverance with CSR activities" and said that its ongoing commitment to social responsibility "shows even greater consideration for relations with our stakeholders." But FTSE received a number of calls flagging the contradictive move up, and says its policy committee will review Takefuji's inclusion next Spring. "The committee would look into whether it was a case of one individual acting alone, or whether the company was responsible for supporting a system that allows that kind of activity," FTSE's SRI advisor, Will Oulton, tells Families In Business. "In our view such a controversy could challenge the integrity of the index and its focus on good CSR practice, but we have systems in place to deal with that."
The case is indicative of the teething pains felt by those working to establish a Far Eastern market in socially responsible investments (SRI), the term given to a range of funds and indices allowing investors access to companies deemed good CSR performers – companies with proven commitment to social, corporate, environmental and ethical good practice.
But those parameters are extremely vague, or even subjective, putting many potential investors such as family offices off or simply confusing them away. Keep in mind that the terms CSR and SRI mean the same thing and are two sides of the same coin; the former refers to the sell-side activity – corporates – and the latter refers to the buy-side, or the investors seeking to invest in corporates.
"We invest more time in our philanthropic efforts as part of being a good corporate citizen than identifying investments that somehow comply with those standards," says Roy Chen, director of his Hong Kong-based family office Sterling Enterprises. "It's easier to identify specific action we can take that way. With SRI there is a lack of information and I wouldn't know where to begin." FTSE's Oulton agrees; "Interest is being drawn towards these non-financial indicators, but the challenge in this part of the world is the lack of sophisticated tools for investors to evaluate how material these issues are to a business, or to understand these types of investments."
While the notion of investment choices based on ethics may seem nebulous, it is a major operation for the corporate finance industry, led by the US where over 60 SRI funds constitute a market capitalisation of around $3 trillion. The sensitivity of share markets in recent years has been exacerbated by a slew of corporate 'fallen angels' that lead to panic share selling and unwanted volatility for investment portfolios, particularly those held by wealthy families and private investors.
The first Far Eastern SRI funds, from regional fund managers Daichi Life and Nikko Securities, were only launched in 1999 but there are now around 11 such funds, with some Western players like Henderson Global Investors in Hong Kong, FTSE in Japan, and tie-ups between West and East such as Japanese bank Nomura's Global SRI 100 index co-managed by US Investment research house, Morningstar. SRI is also available to pension funds in Hong Kong via local investment house Kingsway's launch of mandatory screening for investments selected by the region's Mandatory Provident Fund, according to Asian SRI lobbying and research outfit ASrIA. Taiwan and Singapore have one or two offerings between them.
Remembering that CSR and SRI are two sides of the same coin, there are two broad distinctions within that for investors to align their strategies with. There are funds that facilitate environmentally-concerned investment, and there are funds skewed towards corporate governance-concerned investors.
Environmental funds are gathering speed in the Far East because investors there are already familiar with some of the chronic domestic pollution issues, and their impact not only on the future of their economies, but also on their acceptance onto the world business stage; reportedly 79% of US portfolios investing in SRI focus on companies' environmental records.
According to the World Health Organization, 12 of the 15 cities with the world's worst air pollution are in Asia, and the prevalence of 'heavy industries' like car manufacturing (the bulk of the FTSE4GOOD Japanese index constituents are the construction, industrial or pharmaceutical divisions of major corporates like Sumitomo, Mitsubishi and Toyota) contribute heavily. Governments and business leaders are already well-ensconced in discussion on how to clean up or create systems to prevent more pollution in places where industrialisation is just beginning, and there are more companies with the ISO140001 certification for environmental management systems in Japan than anywhere else in the world.
"Traditionally Japanese companies are strong in this area, but regulation and disclosure rules are lacking and we are pushing for those," says FTSE's Oulton.
The slightly sexier side of SRI is the corporate governance side. Accounting scandals, cash-cow antics and fatal mis-management – two examples being Parmalat or Marsh & McLennan, run at top level by several members of the Greenberg family – have led investors to think about avoiding companies that cannot prove their good intentions through their financial reports. Both company and SRI index transparency are key, especially for some Far Eastern family offices run by families with religious or traditionally strong ethics against gambling, for instance.
"We tend to use fund managers who do not supply transparency in their underlying, and we rarely invest in companies directly, which makes it very complex for us to know what exposure we might have in sectors like gaming or tobacco, which as a family we want to avoid. We have a high level of exposure to hedge funds whose primary concern is making money rather than social responsibility,"says Sterling Enterprises' Chen. SRI fund providers make much of their screening and criteria in permitting companies into their indices, offering a much higher level of transparency than traditional stocks, which in theory could be a far more prudent investment choice even if the driver to get involved is not pure passion for good corporate practice – it's one way of assessing and managing company risk.
Powerful family companies in the Far East – chaebol, zaibatsu or keiretsu – are under the spotlight as SRI indexes become more commonplace. Many of the largest companies in the Far East – and some of the constituents of SRI indexes like the FTSE4GOOD Japan – are listed but remain family-owned through a web of cross-holdings and subsidiaries, commonly seen as an abuse of controlling power and a facilitator of bad governance such as a lack of independent directors. "This presents a challenge and is an area where the interests of SRI/CSR worlds strongly converge with those concerned about corporate governance in the region," ASrIA's Tennant adds. "Some privately-held, listed companies in the region tend to be more arrogant about what CSR means to them and they tend to listen less to what the market tells them. Some families are responding to demand for greater disclosure and accountability, others aren't. But what is clear is that investors are prepared to pay a premium for better corporate governance standards."
The jailing of Singaporean conglomerate SK Global's Chey Tae-Won last year, for accounting fraud at oil refinery arm SK Corp, has further propelled Far Eastern investors in the region to consider issues at home.
"What we are seeing is that Japanese multi-nationals, both in terms of their business and their shareholdings, are feeling the pressure to meet international standards in areas such as labour or human rights – but domestically-focused corporates find things like human rights a real challenge," says FTSE's Oulton.
"There is a heightened awareness globally that poorly-managed corporate governance and social responsibility can affect brand reputation, sales and staff retention, and in effect, the viability of a business."