AN ASSESSMENT OF BRAZILIAN SRI FUNDS

Transcription

1 ISSN AN ASSESSMENT OF BRAZILIAN SRI FUNDS Dalia Maimon (UFRJ) Resumo O objetivo deste trabalho é contribuir para uma reflexão sobre a relação entre o investimento das empresas em responsabilidade social e seu desempenho econômico-financeiro. Nós comparamos a rentabilidade do ISE (Índice de Sustentabilidade EEmpresarial) com os índices de outros negociadas na BM & FBovespa, mercado de câmbio brasileiro Stock. Especial atenção é dada ao comportamento dos acionistas durante a crise financeira de O artigo começa com um resumo teórico e empírico da literatura relacionada a esta questão. Apresentamos também um contexto histórico que revela os motivos que levaram ao surgimento do ISE em BMF & FBovespa, sua metodologia e critérios utilizados para selecionar as empresas listadas nesta carteira. O crescimento do investimento socialmente responsável em todos os países industrializados e, mais recentemente em países emergentes poderia ser um indicador de crescimento da RSE. Investimento socialmente responsável (SRI) é definida como o conjunto dos objectivos de desempenho financeiro com as preocupações sobre as questões sociais, ambientais e éticos. Nós tentamos entender o porquê BMF & FBovespa, especulativo, introduziu esses fundos éticos. O artigo compara os fundos SRI no Brasil a partir de 2005, a criação do ISE (Índice de Empresas Sustentáveis) para Analisamos também as metodologias de escolha das empresas que fazem parte deste índice e do movimento da empresa para estar dentro e fora durante estes 6 anos. Palavras-chaves: Sustentabilidade, finanças sustentáveis;

2 The objective of this paper is to contribute to a reflection on the relationship between companies investment in social responsibility and their economic-financial performance. We compared the profitability of the ISE (Corporate Sustainability Index) with the others indexes traded in BMF&FBovespa, Brazilian Stock Exchange Market. Special attention is given to the behavior of shareholders during the financial crisis of The article begins with a theoretical and empirical summary of the literature related to this issue. We also present a historical context that reveals the reasons that led to the emergence of the ISE in BMF&FBovespa, its methodology and criteria used to select the companies listed in this portfolio. Theoretical Considerations From the theoretical point of view, two main perspectives explain the relationship between corporate social responsibility (CSR) and economic or financial performance. The first perspective is that the performance of the company in CSR negatively influences economic/financial performance. This approach was assumed by Friedman (1960 and 1972). Investment in CSR generates more costs than revenues, reducing profitability, and can cause discontent among shareholders. The second perspective is based on Stakeholder Theory (Freeman,1984) and Competitive Advantages (Porter and Linde, 1995 and Porter and Kramer, 2006). Here CSR positively influences the economic and financial performance. In the Stakeholder Theory the dialogue with stakeholders contrasts with the single focus on profit. Being aware of the complexity of stakeholders allows a systematic and anticipatory management to minimize business risks. The organization is committed to a constructive relationship with stakeholders to strengthen its legitimacy, to develop a positive reputation (Cardebat et Cassagnard, 2011; Orlitzky, 2008), to effectively manage their risks (Godfrey, 2005) and thus finally to improve its long-term financial viability. The argument built by Porter and Kramer is that firms should identify issues containing both economic and social goals, and then use this expertise to generate market-based solutions. In this way, both economic and social values are maximized. CSR should be an integrated component of strategy throughout all aspects of operations. In the long term, shareholder value is maximized by meeting the needs and demands of the firm s stakeholders, broadly defined. In other words, the business focus remains the same, the way you reach it, with a CSR perspective, is that makes difference. 2

3 However, empirical studies are quite controversial about the relationship between CSR and financial performance. Many points at a positive one (Allouche e Laroche,2005), Orlitzky et al. (2003) and Margolis e Walsh (2003)), others at a negative (Wright and Ferris, 1997; Cardebat Sirven, 2008) and some others at the absence of relationship (Aupperle et al. 1985; Seifert, Morris and Bartkus, 2004). The reasons for the divergent results are related to contingency and methodological factors. Orlitzky, Schmidt and Rynes (2003) show that the errors in sampling and measurement of variables related to social and financial performance may be the cause of 15% to 100% of the variability of the results between the studies. Although literature seems mainly conclude upon a positive relationship between CRS and economic financial performance, the theoretical and methodological foundations that guide studies are highly questionable, being in particular, the performance measurement issues largely unreliable (Jegourel Y et Maveyraud S., 2011). Evolution of Social Responsible Investment SRI In the late 1990s, the Capital Markets answered to the demand s increase in socially responsible investment, also called 'ethical funds' or 'green funds'. An investment is considered ethical because it uses social or ethical criteria in the selection and management of portfolios. (Cowton,1994). It is possible to distinguish several methodologies for the selection of the SRI: 1. Negative Screening: the funds exclude companies concerning their behavior in human rights, environment impacts etc; or exclude sectors of activity such as tobacco, armaments, etc. This method of exclusion is still widely practiced in the Anglo-Saxon countries. 2. Positive Screening: the funds include the Best in Class selecting companies with the best environmental, social, governance practices or shareholder activism. 3. The Thematic approach: includes companies in a given sector or promoting certain practices. The investment will be thus concentrated on companies of renewable energy, water, treatment of waste, health, etc. In the United States, since 1995, a new category of investment, called Social Responsible Investment-SRI has been launched. Assets in social portfolios climbed to U$3.07 trillion at the beginning of 2010, a 34 percent increase since 2005 (SIF, 2010). During the financial crisis, from , SRI assets increased more than 13 percent as the broader universe of professionally managed assets increased less than 1 percent. A survey conducted by Eurosif, in 2010, among nineteen European countries, evaluates that the SRI market reached nearly 5 trillion euros at the end of 2009, against 2,7 trillion at the end of 2007 (Eurosif, 2010). The Dow Jones Sustainability Index (DJSI) is a series of indices created, in 1999, by Dow Jones Indexes and Sustainable Asset Management (SAM), an Asset Management 3

4 firm based in Switzerland. DJSI represents groups of companies considered more sustainable based on analyses of social responsibility, environmental and governance aspects. As 2010, more than 300 companies from more than 20 countries were listed. The DJSI uses the Best in Class methodology. Inspired by the American experience, the London Stock Exchange and the Financial Times launched in 2001 the FTSE4Good. The series, made up with four indices, were developed by the research company Ethical Investment Research Services (EIRIS) and evaluate the development of global businesses according to environmental and human rights criteria and the engagement of stakeholders. It excludes weapons, nuclear, and tobacco industries. South Africa was the first emerging market to incorporate sustainability into its stock exchange market. The Johannesburg Stock Exchange (JSE) launched its SRI index in 2004, inspired by FTSE4Good methodology. The JSE does not exclude any sector, classifying them according to their high impact. The rating is based on social, economic, environmental, and corporate governance criteria, evaluated from the point of view of policy, management, development, reporting, and public consulting. Some criteria are eliminatory and companies must score in these categories to qualify to the JSE index. Brazilian Context In Brazil, SRI started in January 2001 when Unibanco, a Brazilian bank, launched its first service to research companies committed to the environment among the country. The service aimed mainly allocation for European and North American SRI funds although not exclusively. At the end of 2001, Banco Real ABN Amro launched two Ethical Funds, the first SRI funds in emerging markets. Since their creation, both funds have outperformed the BM&FBovespa Index (IBOVESPA). In 2004, Banco Itau launched its Itau Social Best Pratice Fund (Fundo Itaú Excelência Social), focusing on Corporate Social Responsibility. BM&FBovespa also launched the Corporate Governance Stock Market Index (Índice de Ações com Governança Corporativa Diferencida or IGC), tracking companies highly committed to corporate governance. A large number of other investment funds also joined this new concept. According to BM&FBovespa there was, in 2010, an amount of almost U$ 1 billion invested in Equity Funds focused on sustainable companies (BM&FBovespa, 2010). Additionally, BM&FBovespa was also the first stock market in the world to join the Global Compact, in 2004, and since 2006 is taking part of the Brazilian Board as vice president. The international scenario encouraged BM&FBovespa to create the ISE (Índice de Sustentabilidade Empresarial), an index tracking the economic, financial, corporate governance, environmental and social performance of the leading companies listed in the Brazilian Stock Exchange. It was launched in December 2005 to provide asset 4

5 managers and investors with a reliable and objective benchmark of the best corporate sustainability practices in the country. The ISE project was financed by the International Finance Corporation (IFC), the private sector arm of the World Bank Group, an organization that promotes sustainable private sector investment in developing countries. Developed by the Center for Sustainability Studies of Getúlio Vargas Foundation, a leading business school in Brazil, the ISE can include up to 40 companies that seek excellence in managing sustainability. The Advisory Board of ISE is very disputed, and suffered a lot of changing. In 2011, the board was composed, among others by BM&FBovespa, IFC- International Finance Corporation, Abrapp-Brazilian Association of Pension Funds, AMBIMA-National Association of Financial and Capital Markets Institutions, MMA-Ministry of the Environment and UNEP-United Nations Environment Programme, IBASE Brazilian Institute for Social and Economic Analyses, a NGO specialized in social reporting, left the board, because of the presence of the tobacco industry. The Ethos Institute, a NGO who represents the ethical business, was suspended from the board, in 2009, although the Bovespa did not explained the reason. It happened just after the exclusion of Petrobras (Brazilian oil company) in the ISE, in spite its participation in the DJSI. ISE is based on the Triple Bottom Line (TBL), concept introduced by Elkington (1994), which evaluates the economic/financial, social, and environmental dimensions in an integrated manner. The methodology added to the TBL principles, some corporate governance indicators and criteria based on the JSE model. Those indicators created a fourth thematic group, in addition to the TBL, to evaluate the companies. The four blocks are preceded by a group of general indicators. These include, for example, publication of a sustainability or social report, endorsement of the Global Compact of the United Nations and damages or risks to health, physical safety or integrity of consumers and third-parties, as well as to public health and safety, posed by the consumption or use of the company s products. As other SRI, the ISE is revised annually to re-evaluate the companies according to their sustainability levels. By adopting a Positive Screening, no sectors are excluded from the index. The most liquid shares negotiated in BMF&Bovespa will have the opportunity to fill out the questionnaire and participate in the selection process. However, all elements associated with sustainability for each sector will be closely evaluated, including potential risks and adverse impacts associated with the nature of the products and services of each business. The Best in Class methodology uses cluster analysis as a statistical tool in the final classification process. Avoiding deviations generated by a simple adding of assessment scores of such distinct dimensions as the environment and corporate governance, cluster analysis identifies groups of businesses that exhibit similar performance in each 5

6 dimension. The final portfolio will be made up of the cluster of businesses that demonstrates the best practices in all five dimensions. The selection criteria for the theoretical portfolio composed of the ISE is done by sending questionnaires to one hundred and fifty companies pre-selected for their market liquidity. The 2009/2010 survey consists of one hundred ninety-one pages. Based on these data, the Board begins the process of choosing the companies with the best classification for a period of one year, especially considering: -Relationship with employees and suppliers -Community Relations -Corporate Governance -Environmental impact and activities The criteria for inclusion of companies in the ISE must also meet the following requirements: Be one of the 150 stocks with the highest negotiability index; have been traded in at least 50% of the defined trading days; meet the sustainability criteria endorsed by the Board of ISE. Companies can also be excluded from ISE for several reasons as bankruptcy, significant changing in criteria levels, etc. Table 1 - ISE: Portfolio Distribution by Sector Portofolio 2005/ /2010 SECTOR Number of Numbers of % % Companies Companies Water and Sanitation 0-1 2,98 Processed Foods ,30 Medical Diagnosis 1 3, Meat and Derivatives 1 3, Transport Construction 1 3, Construction and Engineering 0-1 0,91 Electricity 9 32, ,38 Toll Motorway 1 3, Financial Intermediaries 5 17, ,83 Paper and Pulp 3 10,71 3 8,37 Machinery and Equipment 1 3,57 1 0,33 Transport Material 2 7,14 1 5,64 Pension and Insurance 0-1 1,26 Personal care products and Cleaning 1 3,57 1 5,24 Chemicals 1 3,57 1 2,47 Health 0-1 2,98 Steel & Metals 1 3, ,48 6

7 Telecom ,83 Transport 1 3, TOTAL Source: The ISE's consists of 43 shares of 34 companies representing 19 sectors (table 1). The Electricity sector that has been the most representative in the portfolio, with 32.1% of the total, has fallen to 14.4%, in The financial sector also declined from 17.9% to 14.8% in the same period. On the other hand, the Steel & Metals sector that represented approximately 3.6% in , reached 13,5% in Energy and Steel Metals are highly weighted in the index although these sectors are usually considered as having high environmental impacts. Additionally, the Oil, Gas, Biodiesel, Alcohol, Tobacco and Weapons sectors don t have companies represented. Other highlights of participating companies: 100% of businesses have commitment to sustainable development formally integrated in the strategy; 97% of them publish their sustainable commitment in websites; 100% declare their commitment to: the environment, business ethics practices and relations with customers and consumers; 87% have joined voluntary programmes on all of its units, as well as all of its subsidiaries or affiliates; 100% publishes sustainability report, and in 79% of cases the report is an integral part of the main corporate report; 84% follow the guidelines of the Global Reporting Initiative (GRI). In 92% of cases there is direct management s involvement in the sustainability report. Graphic 1, bellow, compares the variation of the ISE with the Bovespa Index. It shows that both followed the same trends, partly explained by the fact that the ISE companies represent important part of Bovespa trade. During the financial crisis, however, Bovespa Index had better performance than the ISE. It could suggest that investors look for more speculation than for minimizing the long term risk. Graphic 1, Evolution of ISE and Bovespa Index 7

8 ISE Bovespa On Table 2 can be observed that there is a great variation among yearly returns. Specially, during the 2008 financial crises, ISE decreased sharply, as well as all other Brazilian stock indexes. Table 2 - Variations of the Annual ISE Year R$ Annual Return (R$) U$ Annual Return (U$) 1/11/ ,00 453, ,08 4,01 444,35-1, ,42 37,82 670,45 50, ,81 40, ,78 69, ,19-41,09 507,14-55, ,04 66, ,58 123, * 1.849,96-6, ,90-9,33 Source: Next in Table 3, we observe that during the term of the ISE portfolio, the highest closing price in U.S. dollars, occurred on May 30, 2008, in nominal dollar values corresponding to U$ 1386,37. The lower closing price, occurred on November 21, 2008, during the last major financial crisis, declining to U$ 427,09 i.e almost one third of the initial price. Table 3 - Records of the Annual ISE Year Major Price Minor Price R$ date US$ date R$ date US$ date 1.056,3 06/12/200 06/12/ ,0 30/11/ ,0 30/11/ , ,4 28/12/200 28/12/200 13/06/ ,6 13/06/ , ,

9 ,0 7 06/12/ , ,0 28/05/ , ,0 30/12/ , ,9 06/01/ ,7 * Source: 07/12/ , /05/ ,44 30/12/ , /01/ , /03/ /10/ /03/ /05/ , , , ,4 6 05/03/ /11/ /03/ /05/201 0 Table 4 below shows the annual rates of ISE s growth compared with others Bovespa indexes, between the years 2005 and The profitability of ISE is a good one but not a leader one. The energy fund, IEE, and Bovespa Index are the best scores. Table 4 - Annual growth rates of the ISE and others Bovespa Index Index 2006 x x x 2005 ISE 37,8 39,1 17,3 IBOVESPA i 32,9 38,2 19,7 IGC 41,3 38,8 21,6 IBrX50 33,7 42,2 18,7 IBrX 36,1 41,8 19,3 IVBX-2 34,1 24,4 11,4 ITAG 42,5 34,3 16,4 1 ITEL 10,7 13,4 13,2 IEE 40,8 32,0 25,1 INDX 38,5 39,3 18,2 Source: IVBx-2 Valor Bovespa Index - 2nd Line: aims to measure the return of 50 securities issued by companies of excellent image among investors. ITAG Special Tag Along Stock Index - composed by companies that offer better conditions for minority shareholders 1 BM&FBovespa Indexes: IBOVESPA - the leading Brazilian index IGC - Index of Corporate Governance IBrX-50 - composed by the 50 most trades stocks IBrX Brazil Index - composed by the 100 most traded stocks 9

10 ITEL Telecommunication Sector Index - composed by telecommunications industry, including fixed and mobile. IEE Electric Power Index - composed by stocks from the electricity sector. INDX Industrial Sector Index - composed by companies most representative of the industry. Conclusion The results presented in these statistical studies could not lead to a definitive conclusion that socially responsible investments have a higher return rate than investments in companies that do not adopt the same ethic. Some reasons, alone or combined, could be responsible for this conclusion: As long as regulatory environment becomes more restrictive, companies, especially the bigger ones, need to adopt new standards of good behavior in order to comply with future regulations and develop a good reputation. Because of that, especially in emerging countries like Brazil, these large cap companies become, at the same time, the champions in sustainable practices and in negotiability of shares, participating with an expressive importance both in general and sustainability indexes. As a result, the indexes become highly correlated minimizing possible differentiations.. Maybe the belief that investors buy sustainability indexes or sustainable shares searching for higher returns is displaced. Institutional investors, like pension funds, look to sustainable companies as, among other reasons, guarantee of transparency, good governance and risk control. A company committed to sustainable practices may not lead stock market returns but will be more protected against significant problems like scandals, accidents, penalties, etc. Likewise, sustainable indexes do not, and are not expected to, perform better. A lot of attention has been given to the subject of higher returns of sustainability indexes. But further studies are needed regarding volatility. Companies with better governance have better risk management and, because of that, are supposed to become more protected against unexpected problems. As a result, shares should soften ups and downs, resulting in less volatility which, in turn, is very appreciated by professional investors seeking good risk/return ratios. 10

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