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July 08, 2009

Investors Call for Improved ESG Disclosure by Companies in Emerging Markets
    by Robert Kropp

Seventy percent of respondents to survey by the Emerging Market Disclosure Project say that lack of ESG disclosure by companies in emerging markets hampers their efforts to increase investments. -- Environmental, social, and governance (ESG) disclosure by companies in emerging markets is becoming an increasingly important issue of concern to sustainability investors in the developed world. As Lauren Compere, the Director of Shareholder Advocacy at Boston Common Asset Management, told, "We need to look for good investment opportunities in the future, and they're not going to be in developed markets. If we want to have better investment performance, we need to start looking at emerging markets as a core holding."

The Emerging Market Disclosure Project (EMD Project) is an initiative whose aim is to improve sustainability disclosure in emerging markets. Its organizing partners include Boston Common Asset Management, Calvert Investments, the International Finance Corporation (IFC), and the Social Investment Forum (SIF).

As part of the third and final phase of the EMD Project, which focuses on promoting improved ESG disclosure by corporations operating in Brazil, India, South Korea, Russia, and South Africa, the project partners asked EIRIS, a research organization, to analyze the results of an investor survey to gain a better understanding of investment activities in emerging markets.

The report that was authored by EIRIS, entitled Emerging Markets Investor Survey Report: An analysis of responsible investment in emerging markets, analyzed the responses of 67 sustainability investors, mostly from North America and Europe, who manage over $130 billion of emerging market assets.

Among the key findings of the report is that responsible investors, especially those located in Europe, already have extensive experience in investing in emerging markets, some for longer than six years. An impressive 70% of respondents reported that lack of good ESG disclosure hampered their efforts to increase their investments in emerging markets.

Stephen Hine, the Head of International Relations at EIRIS, told, "Substantial numbers of investors are interested in expanding their exposure to emerging markets. But in order for them to be able to do that, they are requesting improved ESG disclosure from companies in those markets."

And Compere of Boston Common Asset Management said, "The survey serves its purpose as a tool of communication, with input from a lot of global stakeholders. And it addresses criticism from some emerging market companies, who were asking, who are these investors and why are they asking for improved ESG disclosure?"

According to the report, Brazil is making the most progress toward ESG disclosure. Investors cite two important developments in Brazil that allow the government there to pressure companies to improve transparency. First, the Bovespa Sustainability Index integrates sustainability into lending and investment in emerging markets. And second, the presence of local ESG investment research activity in Brazil provides vital information to potential investors from the developed world.

Hine said, "Investment research on ESG issues is beginning to happen in emerging markets, and I think we'll see a good deal more research being undertaken as investors ask for it and funding for such research improves." The report concludes that "improved ESG disclosure would also help drive investment research."

Investors reported that South Africa, China, South Korea, and India were also making progress toward improved ESG disclosure. These findings mirrored an earlier report, co-authored by EIRIS in March, 2009, entitled A Review of ESG Practices in Large Emerging Market Companies, which found "that the large South African and Brazilian companies had adopted higher levels of corporate responsibility than their peers in other emerging market countries."

Among the companies cited by respondents as being their top holdings were Petrobras of Brazil, Samsung Electronics of South Korea, and China Mobile.

Compere is the EMD Project's Korean country team lead. She noted that in South Korea, "The large electronics companies provide good environmental reporting, but need to improve reporting on social and governance issues. We need to raise awareness, and build demand for improved ESG disclosure. This is where investors have leverage."

And Hine observed, "This is quite common among Asian companies. It is easier to observe and quantify environmental challenges. There's a lot of established best practice in environmental management, but less so with social issues."

The report concludes, "There is obviously a record of strong interest in emerging markets among responsible investors." But the report also observes, "There is significant scope for improvements by companies in both the levels of disclosure and the quality and consistency of information provided." The report recommends that companies seek help in their ESG reporting from such established initiatives as the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI).

Compere said of the report, "It was encouraging that 70% of respondents said improved ESG disclosure is important. But investors need to start pushing for increased ESG disclosure, and have research providers deliver better information."

Hine concluded, "I don't want to be blindly optimistic, but I expect a shifting of ground toward better ESG reporting by emerging market companies."

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