Will Socially Responsible investment (SRI) take hold in Asia?
During her talk, Morrison explained that at its simplest SRI is about investing in companies which are perceived to be sustainable in their business practices. This means that their products and services do not incur unacceptable social and environmental costs. In the SRI approach social, environmental and financial factors are given a comparable weighing in reaching an investment decision.
Part of a rigorous SRI process involves the lobbying of companies using an investment house's client money to force change in unethical practices. Thus a successful SRI fund aims to give investors a dual return, which is both financial as well as social and environmental.
Morrison and ASrIA are both evangelical about SRI. They share a desire to raise investor awareness that having a conscience does not mean having to accept lower returns on investments. Morrison is supported by a powerful set of numbers for Henderson's 19 funds - since inception two years ago all the Henderson SRI funds have outperformed their benchmark.
In her talk Morrison emphasized that the Henderson process was traditional fund management PLUS rather than minus i.e. screening out stocks. She said she felt that "this is a great investment opportunity as it's one of the last areas of risk not being managed carefully and a genuine way of adding value for clients and lowering risk in an investment portfolio."
Morrison described five key tenets to the Henderson SRI process; 1) To invest in "Industries of the Future" described as secular growth driven by sustainability issues. Examples of these range from the more obvious, renewable energy to more abstract, education and mass transport. This tends to give the portfolio a growth bias although style weighting will typically vary through the investment cycle.
2) Gatekeepers - seeking out leaders in traditional sectors that are not at risk from sustainability issues and are well positioned to benefit from impending legislation and consumer demand. For example identifying a company vunerable to value destruction if by inappropriate handling of rights of nature they had rights to operate removed ie mining rights which would impact revenues.
3) "Shareholder Advocacy." Engaging with companies to improve their social and environmental practices and effect change. "Substitution is part of the agenda," Morrison added.
4) Screening according to client values and priorities.
5) Engage in policy dialogue to help shape market conditions Morrison gave a topical example to demonstrate how sustainability can be a valuable measure in any stock assessment. Enron was a stock that was unacceptable on several of Henderson's screening criteria and not holding this stock has helped performance numbers while most mainstream fund managers using traditional screening criteria held Enron and their portfolios have suffered from its dramatic fall.
"People have got to change their perception to see that SRI is not a limiting way of investing," she emphasized. The Henderson fund is called NPI Global Care Asia Pacific with a benchmark equally weighted between MSCI Japan and MSCI ex Japan. It has outperformed its benchmark since inception in June 1999.
Morrison commented on some of the stocks in the fund under their sustainability criteria. Henderson's top sustainability grading, industries of the future, has a 8% weighting and includes stocks such as Asahi Pretec for the work it's doing on recycling and East Japan Railway for its attempts to reduce emissions.
The next grading, gatekeepers, which represents 62% of the fund, comprises companies that can have a significant secondary impact on sustainability such as finance, tourism and media. Stocks picked in this sector include Daiwa Securities for its record on corporate governance and Kookmin Bank for its focus on risk management and rigorous code of ethics.
The third grading, sensitive, is 30% of the fund and normally includes industries such as life sciences, construction and manufacturing - those which can have a major impact on the environment in the way they conduct their business. Morrison cited the example of Canon outlining both the financial and environment factors that make this stock attractive. Good positioning and penetration of the coloured office products, good supply chain management and environmental accounting, were three of the criteria.
City Development was also quoted for this grading for its eco-friendly lifts and community initiatives.
The Henderson Global SRI team has 1.3bn sterling under management but confirmed that only a nominal amount has come from Asian investors, a number that AsriA would like to see far higher. Morrison believes that it is the performance numbers which will talk to Asian investors and that education forums are starting to make headway.
She concluded that SRI's marketing should be focused on taking away the negative conotations of exclusion of stocks and make people appreciate that stocks which have passed the SRI screening are the companies of the future which will bring long term returns. The launch of Dow Jones Sustainability index and the FTSE4Good World Social index were very positive endorsements by the finance community of their acceptance of SRI.
Morrison also noted that SRI benchmarks can play a key role in raising corporate awareness. She said, "corporates have a horror of exclusion which in US and UK has driven them to re-evaluate some of their practices," to get through the SRI screening process.
The performance of SRI funds is best measured against their counterparts in the mainstream by using FTSE and MSCI etc to help direct comparison and benchmarking. The first SRI fund in Japan was launched in 1999 and there are now 10 funds in Japan along with funds in Singapore and Hong Kong.
There are downsides of SRI, however, as the additional research and lobbying essential to a robust SRI product adds to the cost of producing the fund and along with the lower economies of scale due to the smaller size, the cost of an SRI fund is typically higher.
In parallel to the SRI movement Non Governmental Organisations (NGOs) are asking fund managers for greater transparency. However fund managers often like to keep their engagements with corporates on a more confidential basis, which they find makes them more open and positive.
According to Morrison, fund managers still welcome the input from NGOs as a third party. "The NGOs help drive the debate by making 'noise' and being increasingly forceful in their approach to government and corporate way of operating," she argued.
ASrIA is a not-for-profit, membership association established early 2001 by Tessa Tenant, ex Henderson Fund Manager and is dedicated to promoting sustainable and responsible investment (SRI) within the Asian capital markets. Through various formats ASrIA is aiming to promote global best practice within the boundaries of Asian view points and priorities. It has recently appointed a new executive director, Louisa Mitchell, ex Goldman Sachs banker, to help drive the next stage of development. Since launch last year, ASrIA has been very active managing to sign up 41 members including financial institutions collectively managing US$ 1 trillion, as well as raise sponsorship funds, commission research and host an inaugural conference in Hong Kong to help to stimulate the debate in Asia.