How to Incorporate Emerging Markets into Socially Responsible Investment Funds

CSR and socially responsible investing (SRI) have made large improvements in the environmental and social performances of corporations.  SRI is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $2.71 trillion in 2007, an increase over the $2.16 trillion counted in 2003 according to the Social Investment Forum (SIF)

According to Green Money Journey, "at the start of 2010, professionally managed assets following SRI strategies stood at $3.07 trillion, a rise of more than 380% from $639 billion in 1995, the year of the SIF Foundation’s first Trends Report. Over the same period, the broader universe of assets under professional management increased only 260% from $7 trillion to $25.2 trillion. During the financial crisis from 2007 to 2010 the overall universe of professionally managed assets has remained roughly flat while SRI assets, as documented in the report, have enjoyed healthy growth."

While it is already a huge market in US and Europe, it order for to attract more investments in development countries, there needs to be a greater degree of transparency.  Many investment companies are very cautious in emerging markets because of the lack of available data on the companies' environmental, social and governance (ESG) factors as compared to US and European companies.

The potential of SRI is not something that can be isolated to the Western business world alone. Considering that SRI investors encourage corporations to improve their practices on ESG issues, ignoring emerging markets seems foolish. SRI investors can put their money to work in undeserved communities worldwide, to build a more sustainable world whilst earning competitive returns.

Direct community investment is the untapped potential of SRI especially in developing world.

There are many companies in the Asian market looking into SRI. For example, Blue Orchard, a microfinance investment manager, exists in order to invest the funds of high wealth individuals into microfinance. India's first microfinance investment fund, Bellwether is preparing a fund for East Asia. ABN Amro launched India's first SRI fund but its SRI methodology does not match international standards. It evaluates companies mainly on disclosures and transparency, but does not evaluate the company’s performance on ESG parameters which are critical in evaluating socially responsible companies.

In January this year, the Wall Street Journal's Erin McCarthy wrote an piece entitled Socially Responsible Funds Take on Emerging Markets. She noted that there's been an inflow of funds gushing into emerging markets, with over $92Bn  in 2010 alone (that's up 11% from the prior year). In spite of this statistic, finding companies that match the strict requirements of SRI will be challenge for emerging markets. The lack of independent databases to verify whatever disclosure reports are available is another stumbling block. Finally, there is always the worry of interference from the local government as well as cultural mistranslations. Unless these and other challenges are overcome, SRI will not be arriving in full force any time soon in the emerging markets.