International SRI Criteria
By Michael Kramer
This article appeared originally in the Winter 2007 edition of the Natural Investing newsletter
International investing is an integral part of Natural Investing. But which countries and foreign-owned companies make suitable investments? Over 20 years ago, SRI investors helped bring down the apartheid regime in South Africa by divesting in American companies conducting business there and asking them to cease operations there. This legacy is carried on today by seeking to avoid investment in countries which are deemed repressive or otherwise in violation of international human rights and environment standards.
There are relatively few SRI funds that focus on buying stocks outside the U.S. These include Calvert World Values and Portfolio 21. In 2005, Domini launched their European fund (see Natural Investment News, Summer 2006) and has recently opened a new PacAsia fund.
We are still waiting for someone to offer the first SRI international bond fund. Perhaps this is because of the difficulty of deciding which countries would be acceptable to SRI investors. I’ve been researching this area and found that there is no consensus on what the criteria should be for excluding or including certain countries.
There are many ways to gather information about specific countries. The U.S. State Department maintains a list of politically unstable countries such as Nigeria, Indonesia, Iran, Israel, Lebanon, Algeria, Haiti, and Saudi Arabia.
The Global Horizon Fund, a private equity fund of local funds, rates 70 developing countries. While it is not an SRI fund per se, it does include criteria such as political rights, protection of sensitive lands, carbon emissions, access to clean water, and environmental protocols signed. Atop its list of preferred countries are South Korea, Israel, Slovenia, Estonia, Taiwan, Hungary, Latvia, and Uruguay, while at the bot- tom are Zimbabwe, Kenya, Tanzania, Uganda, Pakistan, Papua New Guinea, Ghana, Senegal, and Bangladesh.
For environmental analysis, the most comprehensive listing is called the Environmental Performance Index. Factors such as Kyoto and Montreal treaty ratification, biodiversity and habitat preservation, deforestation and other natural resource usage rates, water and air quality, carbon emissions, waste, eco-efficiency, marine catch, and energy sources are all considered in the rating and ranking of 133 countries.
Environmentally, countries ranked highest are New Zealand, Sweden and Finland. In general, Scandinavia and Western Europe score the best, though Australia, Taiwan, Slovakia, Colombia, Canada and Malaysia are also considered top-quartile performers among the 133 countries assessed. The United States, incidentally, placed 28th. At the bottom are many under-resourced African nations such as Mali, Ethiopia, Angola, Chad, and Niger, though Pakistan, India, Mongolia, Haiti, and Cambodia also rate in the lowest quartile. Investors can examine country profiles in order to ascertain whether or not they wish to support or avoid a particular country with their investments.
Social and governance issues are broader still, and might address political rights, education, health, civil liberties, labor and legal standards, gender rights, military expenditures, religious freedom, and human development standards. Some research can be gleaned from human rights organizations such as Amnesty International, Human Rights Watch, and the Carter Center. Problems in Guatemala, Uganda, Sudan, Burma, China, Russia, Mauritania, Congo, Peru, Cuba, and Bolivia are being addressed through a variety of initiatives.
Independent research firms such as Verite ́ are very helpful. Verite ́ has con- ducted 1500 factory evaluations in 60 countries in order to help gather facts regarding country-level compliance with internationally accepted labor standards. Verite ́ has since narrowed this analysis to the 27 major countries in which American companies have significant economic production activities. Of the 27 countries ranked, Hungary, Poland, Czech Republic, Israel, Argentina, Chile, Taiwan, South Africa, Korea, and Peru were the top 10 nations, while at the bottom were Pakistan, India, Malaysia, China, Indonesia, Morocco, Colombia, Egypt, Thailand, and Brazil. Of course, these rankings are not static, as countries shift policies and practices continually. For example, Colombia has now ratified a child labor ILO convention, Morocco has less government interference in unions in recent years, and Taiwan now has a sexual assault reporting system.
Investors therefore have to piece these various reports together to make a determination as to which countries are off limits and which ones are acceptable for investment. CalPERS, the pension system for California pub- lic employees, does just that, and creates a list of acceptable countries. They look at the government issues of labor standards, political stability, and transparency as reported by Verite ́, but then also add market liquidity, capital mar- ket openness, and a transaction cost assessment to make a final ranking of permissible equity markets for investments. In the final tabulations, published last spring, Hungary, Poland, Chile, Czech Republic, Taiwan, South Korea, Israel, South Africa, Brazil, and Mexico round out the top 10, while Venezuela, China, Colombia, Sri Lanka, Egypt, Pakistan, Russia, Morocco, and Malaysia received the lowest scores.
As you can see, SRI research for international investing is still evolving. NIS monitors a wide range of sources to assure that our clients have access to investment opportunities that promote social and environmental progress throughout the world.
Trackback from your site.
Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.