Final Report

Criteria Used by Socially Responsible Investment funds in the Private Sector:

Classification and Use in Peru.

CIES Projecto PM 31-2003

Burton Hamner, MBA, MMA

Profesor Visitante, Centro de Investigacion,
Universidad del Pacifico, Lima

Elizabeth Longa, Project Assistant

December 15, 2004

 i

Abstract

Peru has three significant reasons now to promote Corporate Social Responsibility (CSR) to na-
tional firms: Attracting new investment, accessing foreign markets and reducing negative im-
pacts. But how to define CSR so it is directly tied to markets has always been difficult, and thus
firms in Peru and elsewhere are slow to link CSR to business value. But the very recent and
rapid rise of the Socially Responsible Investment (SRI) movement allows us for the first time to
identify a market-based definition of CSR that Peru firms can use to add value and compete
globably and sustainably. We show Peru firms how international investors define CSR, and
how using this definition leads to strategic benefit. To help Peru firms actually implement CSR,
we integrate CSR elements with the national quality standards used to promote competitive-
ness. This is the foundation for a specific strategy to promote market-based CSR in association
with national directives for investment and quality.
 ii

Acknowledgements

I wish to thank CIES for its direct support of this research, and I thank the reviewer who offered
valuable perspectives about the work. The ProInversion organization endorsed my initial pro-
posal and I thank them.

All my work in Peru was made possible with the support of the Universidad del Pacifico. I wish
in particular to acknowledge Prof. Pedro Franco for encouraging me to apply to the University
and for his support throughout my time at UP. Pedro made possible for me a once-in-a-lifetime
opportunity – to live and teach in a fascinating country, in a great institution, and create some-
thing sustainable for the future. I will always be a supporter of Pedro and the UP, and their new
Centro de Gerencia y Contabilidad Sostenible.

Prof. Martha Chavez helped me greatly to settle into UP and navigate through the administra-
tion, and was very kind always to help me understand how to live in Lima. Prof. Jesus Tong
was always interested in sharing ideas and very welcoming. Prof. Felipe Portocarrera endorsed
my participation in the Centro de Investigacion and supported my research aims, with the excel-
lent help of Catherine Vasquez. Thanks also to the other faculty in the accounting department
and my other friends at UP.

Elizabeth Longa was my best student of Environmental Management Accounting and I was
lucky that she became my research assistant also. She now is probably the most informed per-
son about Socially Responsible Investing in all of Peru – a national treasure! Elizabeth is pro-
fessional, smart, efficient and nice and I will follow and assist her career with great interest.

The entire time I lived in Lima, almost 2 years, I was fortunate to meet many people who care
about social responsibility and are leading their country forward. There are too many to list, but
I want to say thanks in particular to Henri le Bienvenue, Federico Cuneo, Roque Benevides,
Mariano Paz Solan, Carlos Rios, Bertha Olarte and Manuel Ponce Ruiz at U Lima, and Cecilia
Rosell, Rosa Salas and Dora Cortijo and Chantal Maurer at CONAM. They all contributed their
knowledge and enthusiasm and were nice to work with. People like this are the proof that Peru
is on the right track towards sustainable development.

The chapter describing CSR in Peru almost certainly contains some errors about activities and
organizations. There are many CSR activities and advocates in Peru and I apologize to anyone
who feels they were not adequately represented in this paper. I am happy to receive correc-
tions or more information about the organizations described and take full responsibility for er-
rors.
 iii

Table of Contents

INTRODUCTION ............................................................................................................................ 1

CHAPTER 1. SOCIALLY RESPONSIBLE INVESTMENT .......................................................... 3

BACKGROUND AND SOURCES ........................................................................................................ 3
SCOPE AND TRENDS OF THE SRI MARKET..................................................................................... 6
SRI INDEX FUNDS ......................................................................................................................... 9
SRI AND MARKET PERFORMANCE: ACADEMIC EVIDENCE ........................................................... 10
SRI AND MARKET PERFORMANCE: MARKET EVIDENCE ............................................................... 15
REPORTING CSR PERFORMANCE TO INVESTORS ........................................................................ 18
CHAPTER 2. TRENDS IN SOCIALLY RESPONSIBLE INVESTMENT ................................... 22
QUALITY ..................................................................................................................................... 22
BANKING ..................................................................................................................................... 25
CORPORATE GOVERNANCE ......................................................................................................... 29
PENSION FUNDS ......................................................................................................................... 30
SRI and Pension Legislation ................................................................................................. 33
Best Practices for Pension Fund SRI.................................................................................... 36
EMERGING MARKETS .................................................................................................................. 39
Stock Investment in Emerging Markets ................................................................................ 39
Foreign Direct Investment in Emerging Markets................................................................... 43
Corporate Social Responsibility in Emerging Markets.......................................................... 45
SRI Funds in Emerging Markets ........................................................................................... 47
Microfinance in Emerging Markets........................................................................................ 50
CHAPTER 3. CSR CRITERIA FOR SOCIALLY RESPONSIBLE INVESTMENT .................... 53
OVERVIEW OF POSITIVE CSR CRITERIA IN SRI ........................................................................... 53
CORE CSR CRITERIA FROM THE MARKET ................................................................................... 57
MODEL FOR INVESTOR-BASED CSR IN A QUALITY FRAMEWORK .................................................. 60
MODEL VALIDATION..................................................................................................................... 65
CSR ASSESSMENT TOOL FOR INVESTOR COMMUNICATIONS ....................................................... 67
CHAPTER 4. STRATEGY IN PERU FOR PROMOTING INVESTOR-BASED CORPORATE
SOCIAL RESPONSIBILITY AND SOCIALLY RESPONSIBLE INVESTMENT......................... 71
OVERVIEW .................................................................................................................................. 71
CORPORATE SOCIAL RESPONSIBILITY IN PERU ............................................................................ 72
PHASE 1: COORDINATION AND CAPACITY-BUILDING.................................................................... 76
Improve Awareness of CSR and SRI.................................................................................... 76
Integrating Quality and Corporate Social Responsibility ...................................................... 77
Improve the Management of CSR in the Principles of Corporate Governance in Peru....... 79
PHASE 2: SECTOR STRATEGIES FOR PROMOTING MARKET-BASED CSR AND SRI IN PERU ......... 82
Bank Management of Social and Environmental Risks in Credit ......................................... 82
Foreign Direct Investment ..................................................................................................... 85
The Bolsa de Valores de Lima .............................................................................................. 86
Private Sector Mutual Funds ................................................................................................. 87
PHASE 3: SOCIALLY RESPONSIBLE INVESTMENT IN THE NATIONAL PENSION SYSTEM ................. 92
CONCLUSIÓN ............................................................................................................................ 101
 iv

APPENDIX 1: BIBLIOGRAPHY ............................................................................................... 103

APPENDIX 2: SELECTED BIBLIOGRAPHY FOR CORPORATE SOCIAL RESPONSIBILITY

IN PERU...................................................................................................................................... 109

List of Figures

Figure 3: Structure of the SRI Market............................................................................................. 4

Figure 4: Environment, Health and Safety Drivers That Add Shareholder Value ........................ 9
Figure 5: Performance of European SRI Funds vs the FTSE All-Share Index Performance .... 16
Figure 6: Performance of the Dow Jones Sustainability Index ................................................... 16
Figure 7: Performance of Some SRI Indexes ........................................................................... 17
Figure 8: CSR Performance Reporting Indicators Recommended by the Global Reporting
Initiative.................................................................................................................................. 20
Figure 9: Cycle of Development for Corporate Social Responsibility and Socially Responsible
Investment ............................................................................................................................. 21
Figure 10: The composition of capital flows to Emerging Markets ............................................. 39
Figure 11: SRI Funds in Emerging Markets ................................................................................ 48
Figure 12: Example Database of SRI Criteria ............................................................................. 55
Figure 13: Use of CSR Criteria in 92 SRI Funds ........................................................................ 56
Figure 14: Survey and Self—Assessment Tool for Corporate Social Responsibility and Socially
Responsible Investing ........................................................................................................... 69
Figure 15: Role of Stakeholders in Corporate Governance in Peru ........................................... 79
Figure 16: Distribution of Investments of the AFPs in Peru ....................................................... 93
Figure 17: Investment Structure in the Multifondo System ........................................................ 94

List of Tables

Table 1: CSR Criteria Source: Market Indexes of "Responsible" Corporations ......................... 10

Table 2: Structure of the GRI Sustainability Reporting Guidelines............................................. 19
Table 3: Social Responsibility Assessment in the Baldrige Quality Award .............................. 23
Table 4: SRI and Pensions in Spain............................................................................................ 35
Table 5: Frequency Analysis of Positive CSR Criteria in European SRI Funds, 2002 ............. 54
Table 6: CSR Criteria Used by the Dow Jones Sustainability Index .......................................... 55
Table 7: Frequency Analysis of CSR Criteria in Market Indexes of "Responsible" Corporations59
Table 8: Clustering of Core Investor-based CSR Criteria in a Quality Framework .................... 62
Table 9: Model Benchmarking: Leading SRI Mutual Funds ..................................................... 65
Table 10: Model Benchmarking: SRI Mutual Funds With Investments in Emerging Markets... 66
Table 11: IFC Criteria for Measuring Sustainability in Investments............................................ 67
Table 12: Criteria Used in the National CSR Competition of Peru ............................................. 73
Table 13: Peru Organizations with Significant Interests in CSR and SRI .................................. 75
Table 14: Private Mutual Funds in Peru ...................................................................................... 88
Table 15: Best Practices for CSR Evaluation by Mutual Fund Managers ................................. 89
 v

Executive Summary
Criteria used by Socially Responsible Investment funds in the Private Sector:
Classification and use in Peru

Socially Responsible Investment (SRI) is the use of specific social and environmental criteria,
in addition to traditional financial criteria, to make investment decisions. Most SRI done by mu-
tual funds and institutional investors who buy and sell shares of publicly traded corporations.
These SRI funds use criteria for Corporate Social Responsibility (CSR) to evaluate compa-
nies. These CSR criteria cover a wide range of topics, including health and safety, corporate
governance, pollution prevention, labor relations, indigeneous peoples and more.

In developed countries and even in some developing countries, hundreds of profit-seeking funds
and a dozen or more market indexes of “responsible” companies now publish the specific crite-
ria for CSR that they use to select or recommend companies for investment. Leading interna-
tional banks are also publishing the CSR criteria they will require for financing certain projects.
The market is clearly stating how it defines CSR. Another perspective is that investors are tell-
ing us what are the specific types of CSR that they believe will lead to more profits.

There is now a sufficient universe of market-based CSR critera, offering thousands of data
points, that we can cluster the criteria and identify the core elements of CSR that are valued by
a relatively large number of investors. Now we can say, “If you want your company to be attrac-
tive to foreign investors and buyers, these are the most important CSR elements you must
have.” Since most of the SRI funds and indexes using positive CSR criteria have only existed
since about the year 2000, this is a very new opportunity with urgent applications.

In countries like Peru it is very important that CSR be defined to be attractive to the global mar-
ket. Peru already has a national CSR movement, with participation by leading national corpora-
tions, medium-sized firms, and many advocates in civic society and government. Prominent
people think strategically about how to promote CSR and there are regular training and informa-
tion events. The motivation for CSR among advocates has primarily been for sustainable na-
tional development, recognizing that the private sector must be the primary force for this. In the
last few years there has been increasing recognition that CSR also includes internal manage-
ment processes that organizations must cultivate, and there are CSR process benchmarks that
managers can use. However, some feel that CSR is being adopted too slowly in Peru because
of lack of interest and larger, more serious problems such as corruption and transparency.

The new market-based definition of CSR directly overcomes these problems. Perhaps the ma-
jor reason for lack of interest in CSR in Peru, and elsewhere, is that business leaders perceive it
as philanthropy and altruism, promoted by “do-good” people. In comparison, the new market-
based CSR is a direct answer to “What do investors and customers want now?” Even if a com-
pany in Peru is small and does not have investors or international customers, the market defini-
tion of CSR still makes because it is focused on profitability and business performance and not
on altruism.
 vi

Figure 1 shows the cycle of market-based CSR development. Funds and indexes publish their
criteria for CSR. This causes companies to develop management processes for those CSR
elements and to make public reports about their performance to potential investors and others.
The funds and indexes study these reports and refine their criteria for CSR, and so on. This
cycle will continue to increase the market knowledge about what kinds of CSR lead to higher
market value.

Figure 1: Development Cycle of Investor-based CSR Criteria

Socially Responsible Investor Criteria

Investment Funds for Corporate
and Indexes Social Responsibility

Management
Public CSR Processes
Reporting for CSR

This cycle is now producing a lot of information. There are thousands of examples of investor
criteria for CSR. We wanted to know, What are the core criteria for CSR that are being used
most frequently by investors now, and how can that information be used to promote CSR
in Peru? We believe that business managers will be more convinced to improve their CSR if
they can see clearly what are the specific kinds of CSR that are valued the most by investors
and bankers.

We conducted original research to identify the core criteria for CSR that are important for inves-
tors. There are over 700 SRI investment funds. As a proxy for their criteria, we studied the 12
market indexes of socially responsible companies that now provide information to the SRI funds.
We developed a database of all the criteria (202 elements) used by these indexes using seman-
tic analysis for common concepts and frequency analysis for popularity. This identified the most
common CSR criteria. The database is in spreadsheet form so others can easily experiment
with it.

We also suggest a solution to the problem of implementation of CSR. It is important to show

clearly how specific CSR elements fit into an existing and respected business management
model that adds value. The most important model we can identify is the National Quality Sys-
tem of Peru, which is based on the the Criteria for Performance Excellence from the Baldrige
National Quality Program in the USA. This model already includes some concepts of CSR.

We determined how to organize the core CSR criteria using the model of the National Quality
System of Peru and the Baldridge Program. This created a unique new approach to promoting
CSR. The exact type of CSR is designed to attract investors and bankers and international
customers. It is implemented in a system for quality and competitiveness that is already pro-
moted and supported in Peru and around the world. This means managers now know what kind
of CSR to implement, and how to do it. Figure 2 shows how CSR criteria fit the Quality model.
Figure 3 shows a business checklist for self evaluation that is based the results. It can identify
opportunities for improving CSR that may be important to potential investors or customers.
 vii

The Use of Market- and Quality-Based Criteria for CSR in Peru

CSR in Peru has been promoted with a motivation for national development, which is of course
appropriate. However it is obvious that this is an altruistic motivation which may not be effective
with many profit-seeking business managers. An important conclusion from our research is that
investors and bankers are more focused on CSR that improves internal business processes
than on philanthropy and social development. The promotion of CSR in Peru needs to reflect
this new development. For example, programs that offer awards for CSR could increase their
use of process-level criteria to evaluate companies. CSR should be promoted first on the basis
that it is believed by investors to add business value. And programs that promote competitive-
ness should specifically include market-based CSR criteria because they increase market inter-
est.

CSR should be promoted together with quality. There are separate national awards for quality
and for CSR in Peru. Our research and model shows that clearly there are opportunities for
synergy between these programs; each would benefit by learning from the other, with our re-
search as a guide.

A group of stakeholders could design an index for CSR in Peru companies using our research.
This will help the index attract international investors. Andean regional organizations could par-
ticipate because there is good potential for a regional CSR index. A regional index would have
enough publicly-traded companies in it that it could be used to design SRI mutual funds for the
region.

The pension companies of Peru are the biggest investors in the country. The investment regu-
lations they follow are being liberalized, and there is now a good opportunity for the government
to promote CSR in their investment policies. At the least, the pension funds should be educated
about CSR so they can follow the example of many of the leading pension funds in developed
countries. At the best, the funds should be required to explain how they consider the CSR crite-
ria we identified in their selection of investments.

There are several other excellent opportunities now for Peru to advance CSR by using this re-
search. A firm foundation is provided by companies, institutions and advocates who are already
promoting CSR and need a more market-oriented approach that interests more companies.
Although there is not much international investment in Peru now compared to other countries,
the whole concept of competing in a global market means that Peru must recognize now that
CSR is critical and it must be done the right way. Investors and international buyers want to see
the specific kinds of CSR that our research has identified. Peru companies can implement this
CSR using the quality model which is already well supported in Peru and recognized interna-
tionally.

The market-based approach to CSR was not possible even 5 years ago because there were not
enough funds and indexes publishing their CSR criteria to make a convincing business case.
Our research is the first to study the criteria used by all the existing CSR indexes, and Peru can
step ahead of its competition by helping its small but growing CSR community use these results
to position for global competition and sustainable development.
 viii

Figure 2: Core Market Criteria for CSR in a Quality Framework

Baldrige Performance Criteria Core Market Criteria for CSR

1.1 Organizational Leadership
a. Senior Leadership Direction CSR and sustainability vision and policy
b. Organizational Governance Good governance
Leadership structure
c. Organizational Performance Review

1.2 Social Responsibility

a. Responsibilities to the Public Responsiveness
Beyond compliance
b. Ethical Behavior Codes of conduct
c. Support of Key Communities Philanthropy
Consultation

2.1 Strategy Development

a. Strategy Development Process
b. Strategic Objectives
2.2 Strategy Deployment
a. Action Plan Development and Deployment
b. Performance Projection
CSR in strategy development
Risk management
Environmental and social strategies
CSR programs

3.1 Customer and Market Knowledge Stakeholder knowledge

3.2 Customer Relationships and Satisfaction
a. Customer Relationship Building Customer relationships
Supplier relationships
b. Customer Satisfaction Determination Customer satisfaction

4.1 Measurement and Analysis of Organizational Performance

a. Performance Measurement Sustainability assessment

b. Performance Analysis
4.2 Information and Knowledge Management
a. Data Information and Availability Public reporting
Labeling and advertising
b. Organizational Knowledge Networking

- continued next page

 ix

- Figure 2 continued

Baldrige Performance Criteria Core Market Criteria for CSR

5.1 Work Systems
a. Organization and Management of Work Labor management and relations
b. Employee Performance Management System Compensation
c. Hiring and Career Progression Discrimination
Diversity
5.2 Employee Learning and Motivation
a. Employee Education, Training and Development Training
b. Motivation and Career Development Profit sharing
5.3 Employee Well-Being and Satisfaction
Work Environment Health and safety
Employee Support and Satisfaction Non-mandated benefits

6.1 Value Creation Processes Pollution prevention

Innovation
6.2 Support Processes Supplier CSR
EHS management systems

7.1 Customer -Focused Results Sustainability benefits to customers

7.2 Product and Service Results Resources use
Waste and emissions
Product certifications
7.3 Financial and Market Results Profit distribution
Taxes and subsidies
7.4 Human Resource Results Health and safety results
7.5 Organizational Effectiveness Results Certifications of processes
7.6 Governance and Social Responsibility Results Compliance
Awards
Social and environmental impacts

Figure 3: Self-Assessment Tool for Corporate Social Responsibility Using Investor and
Index Criteria
Cuestionario y Herramienta de Auto-valoración para Responsabilidad Social Corporativa e Inversión
Socialmente Responsable
Guía de Respuesta
Califique cada criterio de acuerdo
con las siguientes respuestas
Aviso
* Todas las respuestas positivas *
deben ser soportadas por
documentación
0 = Sin capacidad
No se tiene algo que decir al respecto
1 = Con poca capacidad
Se está considerando y se puede
describir su aproximación
2 = Alguna Capacidad
Se puede describir pocas actividades y
responsabilidades
3 = Buena Capacidad
Se puede describir algún programa
en detalle para este punto
4 = Excelente capacidad
Se puede describir plenamente la
política, programa y resultados para este
punto, O se puede proveer los reportes
oficiales de RSC
x
Califique la capacidad de su compañía para comunicar a sus inversores
acerca de Responsabilidad Social Corporativa (RSC)
Criterios de RSC utilizados por los inversores 0 1 2 3 4
RSC y visión y políticas de sostenibilidad
Buen Gobierno
Estructura de Liderazgo
Sensibilidad
Más allá del cumplimiento
Códigos de Conducta
Filantropía
Consulta
RSC en el desarrollo de la estrategia
Gestión del Riesgo
Estrategias medioambientales y sociales
Programas de RSC
Conocimiento del accionista
Relaciones con los clientes
Relaciones con los proveedores
Satisfacción del Consumidor
Valoración de la sostenibilidad
Reporte Público
Nombramiento y Publicidad
Red de trabajo
Relaciones y Gestión del trabajo
Compensación
Discriminación
Diversidad
Entrenamiento
Participación en las ganancias
Salud y Seguridad
Beneficios no obligatorios
Prevención de la Contaminación
Innovación
RSC del proveedor
Sistemas de Gestión EHS
Beneficios sostenibles para los clientes
Uso de recursos
Desperdicios y Emisiones
Certificaciones de Productos
Distribución de Beneficios
Impuestos y Subsidios
Resultados en Salud y Seguridad
Certificación de Procesos
Compromiso
Premios
Impactos ambientales y sociales
 1

Introduction
This paper presents a new investor-based management model for Corporate Social Responsi-
bility based on criteria used by SRI indexes and funds, and the leading international standard for
excellence in organizational quality. Companies in most countries that use this model for CSR
can expect benefits when they:

• Improve organizational performance in key process areas;

• Become more attractive to investors and bankers; and
• Receive technical support from their national and local quality promotion organizations.

CSR in Peru can be promoted with this model. CSR that is valued by investors is particularly
important to Less-Developed Countries (LDCs) such as Peru that depend on Foreign Direct In-
vestment (FDI) for economic development. Effective CSR is also important for any country
whose government has challenges reducing the negative social and environmental impacts of
business. We suggest how institutions and associations in Peru can use this CSR model to:

• Increase local interest and implementation of CSR

• Improve the performance of the national pension system;
• Improve the quality and volume of FDI in Peru;
• Attract more market investors to tradable companies on stock exchanges;
• Support the national quality promotion movement.

This report is intended for readers in Peru and elsewhere who are not familiar with the current
resources for CSR and SRI. Therefore we have included extensive footnotes and brief descrip-
tions of the most important information resources. We have not attempted to document all the
CSR activities and academic analysis already in Peru. There are other sources for that informa-
tion. The section about Peru is focused on recent developments and specific recommenda-
tions.

The paper is arranged in 4 chapters.

Chapter 1 explains how the private financial markets are developing and promoting specific cri-
teria for CSR. It describes the SRI market in general, including its scope, status and perform-
ance. It also includes a description about reporting CSR performance to investors.

Chapter 2 describes the main trends in CSR and SRI that are relevant to our objective. They
include CSR and quality management, CSR in banking and governance, and SRI in pension
funds and in emerging markets.

Chapter 3 identifies the core market-based criteria for CSR and how they should be organized
for management. It presents the results of our research on the criteria for CSR used by SRI
funds to pick stocks for their portfolios. We present a new model for integrating quality and in-
vestor-based CSR criteria, and a new tool for evaluating a company’s capacity to talk about its
CSR to potential investors. This tool can be used by any company. It can also be used by in-
vestors to evaluate CSR in companies.
 2

Chapter 4 discusses how this new model and tool can be used in Peru, and more generally how
Peru can improve CSR and attract more international investment. It includes specific recom-
mendations for organizations and agencies in a step-by-step strategy. We hope this will at least
encourage more collaboration among a broader group of partners.

This report does not discuss several other related themes, such as how CSR is being adopted
now by Peru companies, or creating popular demand for CSR. The original research was fo-
cused on the criteria used by the new SRI indexes and funds in order to create a practical
model. Then we considered strategically how it could be used in Peru, with regard to specific
partners. This was the limit of our objective.

We think that the path of implementation of our CSR model will follow the path of the quality
model. That has been promoted for several years already and, while there is still much to be
done, the path forward is clear. Our concern has always been how to integrate practical mar-
ket-based CSR into what is already happening in Peru.

Several research opportunities are possible based on our research. They include:

Do Peru investors in existing funds care about CSR criteria? Which ones do they care about
and how much? This could be answered with a survey, and could drive Peru fund managers to
learn more about CSR and how to include it in their investment analysis.

Is this new market-based model of CSR more effective in motivating companies to CSR than
the more traditional approach used in Peru? A comparative study could be done promoting the
existing national CSR award to one group of businesses, and the market-based CSR model to
another similar group, to see if there is any significantly different response to the models.

Can Peru companies be rated for their CSR performance using the new model? In the self-
evaluation tool developed through this research, one measure is “we have nothing to say about
this.” We suspect that this will be the answer by most companies to most of the topics. So using
the tool for external rating would be hard due to the lack of data from companies. But encourag-
ing self-evaluation using the tool would be a good start for a rating system several years later.
 3

Chapter 1. Socially Responsible Investment

Background and Sources
SRI has existed for many decades, initiating with investment funds organized by religious asso-
ciations and subscribing to their founders´ religious principles. SRI became a significant market
issue in the 1970s with the controversy over investment in South Africa, then a country with
formal policies of racial discrimination. Many fund managers were pressured by activists to di-
vest their funds of holdings in companies with investments or operations in South Africa. Activ-
ist positions quickly extended to other topics such as tobacco, nuclear power, gambling and
weapons production. These negative screens were adopted by various pioneer funds, but were
widely rejected by financial analysts and economists on the simple premise that these screens
reduce the number of firms eligible for investment, and therefore reduce the potential return.

In the late 1980s a new focus on positive screening became popular. Advocates argue that
companies with better social and environmental performance are more likely to have competent
management and reduced risk, and therefore will have better long-term performance relative to
their competitors with lower social and environmental performance. These positive screens be-
came adopted by many SRI funds, often in combination with negative screens.

Socially Responsible Investing (SRI) is a now a major trend in North American and European
financial markets, including the institutional pension funds, which are the largest investment
funds in the world. It appears to be the fastest growing investment strategy in the market and it
is performing well in comparison to benchmarks.

“Socially Responsible Investing (SRI) is an investment process that considers the social
and environmental consequences of investments, both positive and negative, within the
context of rigorous financial analysis. It is a process of identifying and investing in com-
panies that meet certain standards of Corporate Social Responsibility (CSR).” 1

“In a broad sense, the term SRI is used to describe investment decisions informed by
CSR considerations. SRI combines investors’ financial objectives with their concerns
about social, environmental and ethical issues.” 2

Today, SRI is conducted largely by private mutual funds, by institutional investors such as pen-
sion funds, and community-lending funds and banks. Figure 3 shows the structure of the SRI
market. Data for SRI, such as ratings of corporate CSR performance, are provided by SRI re-
search firms and market indexes. A broad range of institutions use this information for invest-
ment. Researchers and investors are supported by professional and academic networks and
web sites, academic institutions, publications including journals and newsletters, and non-profit
advocacy groups.

1
SIF 2003. 2003 Report on Socially Responsible Investing Trends in the United States. Social
Investment Forum, Washington DC. http://www.socialinvest.org
2
CSRE 2003. Investing in Responsible Business: The 2003 Fund Managers, Financial Ana-
lysts and Investor Relations Officers. CSR Europe, Brussels. http://www.sricompass.org
 4

Figure 1: Structure of the SRI Market

Fondos Mutuos

Fondos Accion Privados

SRI Indices

Fondos de Capital de Riesgo

SRI Asesores

Bancos de Desarrollo

Bancos Comercial

Redes Publicaciones ONGs

ISR ISR ISR

SRI is divided into four major strategies:

Negative screening is the use of criteria for prohibited sectors for investment. The
most common negative screen or criteria is for tobacco. Others include nuclear power,
weapons, pornography, and gambling. There are over 700 SRI funds, and most use
negative screens. In fact many SRI funds only use negative screens. The use of nega-
tive screens obviously restricts the size of the investable market and decreases the
chance of meeting market benchmarks; there is lower probability that funds using only
negative screens will meet or exceed the market benchmarks.

Positive screening is the use of criteria for detailed CSR management performance,
such as health and safety of employees, human rights, emission of wastes and gases,
corporate governance, etc. Positive screening requires deeper research into corpora-
tions. Analysts using positive screens often select the “best in class” in a sector to in-
clude. If deeper research leads to better knowledge of risk and does not restrict the
market for investment, there is higher probability that positive screening that will meet or
exceed the market benchmarks.

Shareholder advocacy is the use of investor voting rights to promote CSR in corpora-
tions. This trend is growing quickly. Institutional investors such as pension funds in par-
ticular are increasing the number of resolutions for CSR that they submit for vote to an-
nual meetings.

Community investing is commercial financing with a mission to generate resources

and opportunities for economically disadvantaged people that are underserved by tradi-
tional financial institutions.

The SRI market has already been defined and studied extensively. In late 2003 the Interna-
tional Finance Corporation published a review of SRI, Towards Sustainable and Responsible
Investment in Emerging Markets: A Review and Inventory of the Social Investment Industry’s
 5

Activities and Potential in Emerging Markets.3 This is probably the most comprehensive review
of the entire SRI market as well as issues and potential in emerging markets. Readers of this
report are strongly recommended to obtain this IFC study as it it summarizes most of the current
data and trends.

Annual reports about the state of the SRI sector are published. In North America the Social In-
vestment Forum (SIF) is the largest non-profit association for SRI. The SIF 2003 Report on So-
cially Responsible Investing Trends in the United States appears to be the definitive information
source for the USA. A website called SocialInvest.Com is another leading source. It is pro-
duced by a group of SRI fund companies. It includes charts of SRI index performance, a data-
base of North American SRI mutual funds with performance and criteria for choosing invest-
ments, and guides to choosing SRI funds.

In Europe there are several multinational organizations that survey SRI. CSREurope is a Non-
Governmental Organization (NGO) based in Brussels with members in 15 countries. CSREu-
rope published the results of its latest survey of SRI in Europe in Investing in Responsible Busi-
ness: The 2003 Survey of Fund Managers, Financial Analysts and Investor Relations Officers. 4
CSREurope produces the SRICompass.Org website which includes trends reports, market per-
formance and a database of SRI funds in Europe.

The European Social Investment Forum (EuroSIF) also publishes a recent survey, titled Socially
Responsible Investment Among European Institutional Investors 2003 Report.5 EuroSIF also
published numerous other surveys and reports on SRI in Europe.

The Global Environmental Management Initiative (GEMI) is a business NGO whose members
include some of the largest corporations in the USA. GEMI has published a report on CSR and
shareholder value titled, “Clear Advantage: Building Shareholder Value.”

There are numerous other sources of information from consulting companies, NGOs and aca-
demic institutions. Comparing their data is difficult in most cases because they use different
definitions and research designs. However the main trends and conclusions are quite similar for
all the sources. The following summary is a digest of market information from many sources,
specifically including the reports described above. Readers are referred to IFC 2003a for the
most current overview and statistics about SRI around the world.

Because this paper is focused on SRI and Peru, we wish to introduce several literature re-
sources in Spanish:

• The most extensive report in Spanish about “La Inversion Socialmente Responsible” SRI
is produced by the Fundación Ecología y Desarrollo in Zaragosa in partnership with the
Sustainable Investment Research International Group. The report includes articles by

3
IFC 2003. Towards Sustainable and Responsible Investment in Emerging Markets: A Review
and Inventory of the Social Investment Industry’s Activities and Potential in Emerging Markets.
International Finance Corporation, Washington DC. http://www.ifc.org
4
CSRE 2003. Investing in Responsible Business: The 2003 Survey of Fund Managers, Finan-
cial Analysts and Investor Relations Officers. CSR Europe, Brussels.
5
EuroSIF 2003. Socially Responsible Investment among European Institutional Investors 2003
Report. European Social Investment Forum,
 6

SRI professionals and academic observers on the development of CSR and the SRI
market.6
• Steven Lydenberg is one of the pre-eminent figures in the SRI world and directs KLD
Ltd., one of the leading SRI market research firms. In La Inversión Socialmente Re-
sponsable: Pasado, Presente y Futuro he discusses the issues in SRI, the state of prac-
tice and performance, and trends for the future.7
• Franch and Torres provide a good review of the SRI academic literature in Analisis de
los Fondos de Inversion Eticos y Solidarios Espanoles: Evaluacion de la Performance
Social y Financiera, including references to work in English and in Spanish, and examine
the performance of SRI funds.8 They conclude SRI funds are doing well compared to
their market benchmarks.
• Sanmartín describes Instrumentos Financieros Eticos y Socialmente Responsables: Me-
todolgia de Evaluacion del Comportomiento de las Empresas Espanolas.9
• Gutiérrez provides a brief overview of Inversión Socialmente Responsible and of SRI
funds in Spain. 10
• Argandoña describes ethical funds in Spain and the roles and opportunities for the moral
investor.11

Scope and Trends of the SRI Market

Worldwide SRI is estimated at about $2.6 trillion dollars and it doubled in size between 1997
and 2002. There are over 700 SRI mutual funds including over 250 in the USA and over 300 in
Europe. The largest SRI mutual funds have several billion dollars in assets, generating millions
of dollars in management and fees. The largest investment funds that use SRI principles are
state and national pension funds. Governments in England, Germany, France, Sweden and
Netherlands (which has the largest investment fund in the world) now require pensions funds to
disclose their SRI policies and practices (if any). Over half of the pension funds in the UK now
use SRI principles. State pension funds in California (which has the third largest investment
company in the world), New York and Connecticut now follow SRI principles. According to vari-
ous estimates, about 10% of the entire USA stock market now follows SRI principles.

SRI is the fastest growing investment strategy in the market. SRI mutual funds have grown in
number from a handful in 1994 to over 700 in 2004. According to the 2001 Nelson’s Directory of
Investment Managers, the total universe of professionally managed investment assets in the

6
FED 2002. La Inversion Socialmente Responsible. Fundación Ecología y Desarrollo, Zarago-
sa
7
Lydenberg 2000. La inversión socialmente responsable: pasado, presente y futuro. S.D. Ly-
denberg, in FED 2002.
8
Franch 2002. Analisis de los Fondos de Inversion Eticos y Solidarios Espanoles: Evaluacion
de la Performance Social y Financiera. M.R.B. Franch and M.J.M. Torres, Universitat Jaume I,
Castellón
9
Sanmartín 2001. Instrumentos Financieros Eticos y Socialmente Responsables, Metodolgia
de Evaluacion del Comportomiento de las Empresas Espanolas. Sergio Sanmartín, Centro
Asociado Andrés Manjón (UNED), Papeles de Ética, Economía y Dirección, nº 6, 2001
10
Gutiérrez 2002. Inversión socialmente responsible. B. Gutiérrez, Universidad de Zaragoza .
http://www.5campus.org/
11
Argandoña 2000. Los Fondos Eticos y Promocion de la Etica Inversora. Antonio Argandoña,
Universidad de Navarra
 7

U.S. grew at 22 percent, during the same period in which socially screened assets under pro-
fessional management grew by 35 percent. In Europe the number of SRI mututal funds grew
from about 4 in 1994 to over 300 in 2004. As an example of regional growth, in Australia the
assets of SRI-managed funds grew by 86% between 2000 and 2001, twelve times faster than
managed funds as a whole.

The 230 U.S. SRI mutual funds, with combined assets of $153 billion, are not only experiencing
growth but are doing so even as the majority of traditional funds have contracted in the current
market downturn. According to the U.S. SIF, “during the first nine months of 2001, the tradi-
tional mutual fund market experienced a 94% decrease in new money to mutual funds, com-
pared with only a 54% drop for SRI funds.”12 U.S. SIF data showed an even more pronounced
difference between January and June 2002, when there was a net inflow of 3%, or $47 million,
to SRI funds, compared with a net outflow of 9.5%, or about $13 billion, from U.S. mutual funds
overall.

There is every reason to expect that SRI will continue to grow. In November 2003 the Calvert
Group, an investment company, commissioned the Harris Poll Company to survey the public in
the USA about their concerns for SRI.13 Among the report’s findings are:

• More than half of investors surveyed have become interested in SRI in the last two years
and almost half know about specific SRI mutual funds. Of that group, more than a third
have already invested in SRI funds. Most are motivated by concern about corporate eth-
ics and feel that corporations with good CSR performance have less risk and better
management.

• 78% of investors who use a financial advisor are more likely to choose an advisor who
can recommend companies with good CSR performance.

A 2003 survey of European fund managers says that sixty-nine percent of fund managers and
financial analysts, including those who do not practice SRI, believe that the SRI market will con-
tinue to grow at a rapid rate over the next two years.14

SRI is not limited to developed economies. According to one estimate there are about 25 mu-
tual funds that invest in emerging economies.15 Private SRI funds have been started in Brazil,
South Africa, Malaysia and Hong Kong. In 2004, the market indexes of emerging economies
have been performing extremely well compared to developed economies. Increased interest in
emerging economies is now meeting the interest in SRI. Organizations such as the Interna-
tional Finance Corporation and the United Nations Environment Programme are actively en-
couraging SRI in emerging economies.

Business groups are developing CSR criteria in response to market interest. The Global Envi-
ronmental Management Initiative (GEMI) is a business NGO whose members include some of

12
SIF 2003.
13
Calvert 2003. Corporate Responsibility and Investor Confidence Survey. Calvert Group, Bal-
timore.
14
CSRE 2003.
15
IFC 2003a.
 8

the largest and best-known corporations in the USA.16 GEMI has produced practical manage-
ment guidelines on Environment, Health and Safety (EHS) since 1992. These guidelines are
developed by the corporations themselves, with some facilitation by consultants. GEMI sug-
gests that the guidelines should be considered best practice for large and even small compa-
nies.

As of March 2004, the latest management tool produced by GEMI is the report, Clear Advan-
tage: Building Shareholder Value. The purpose of the report, which GEMI calls a “tool”, is to
enable businesses to measure, manage and communicate EHS value to the financial commu-
nity.17 GEMI states,

“Clear Advantage provides compelling evidence of the link between EHS activities and
shareholder value. Because an enterprise's EHS function cuts across many areas of
business, this report covers the EHS function as well as related organizational activities:
community involvement, stakeholder relations, governance, transparency, and business
continuity. In a climate of increased focus on corporate governance and shareholder ac-
tivism, these issues will only increase in importance…

The GEMI Work Group has identified ten intangible value drivers that reflect significant
pathways for value creation through EHS and sustainability. These value drivers are
listed in Figure 3. Utilizing these value drivers, this report demonstrates that (a) strengths
in EHS and sustainability can add value to the enterprise, and (b) these strengths can be
quantified in the form of an index that is relevant to company valuation. Specifically, this
report shows how companies can develop a forward-looking tool that focuses on meas-
uring the strategic contributions of EHS and social performance to enhanced market
valuation.”

16
www.gemi.org
17
GEMI 2004. Clear Advantage: Building Shareholder Value. Global Environmental Manage-
ment Initiative, Washington DC.
 9

Figure 2: Environment, Health and Safety Drivers That Add Shareholder Value

GEMI produces this report partly to educate investors about what types of CSR create value.
GEMI members try to excel in EHS and want the market to reward them for it. More business
groups are responding to the SRI market by advertising their CSR criteria to investors.

We can conclude that SRI is a major growth trend in the markets and in management practice
and that it will soon be an important factor for most major investment decisions. As financial
markets continue their march towards globalization this will inevitably affect investment in
emerging economies.

SRI Index Funds

In addition to investment funds, there are now at least 14 indexes of “socially responsible” com-
panies that are produced by various investment advisory groups. These indexes are marketed
to investment funds, which use them to create their own investment portfolios. Anyone can
learn what companies are included in the index – the investment companies give that informa-
tion freely. But only those who pay can claim they are using a trademarked SRI index product.
For example, the Dow Jones Sustainability Index (DJSI) has sold 50 licenses to investment
 10

companies as of March 2004. This gives the companies permission to use the DSJI in market-
ing their fund and, presumably, more credibility in the market.

The indexes have a range of targets. There are global, regional and national indexes. As might
be expected, the vast majority of the companies included in the indexes are from the most de-
veloped countries.

Table 1 describes the 12 SRI market indexes that publish their details, including launch date,
number of corporations listed in the index, and the number of negative (sectors) and positive
(outstanding performance) criteria.

Table 1: CSR Criteria Source: Market Indexes of "Responsible" Corporations

CSR Market Index Name Launch Listed Negative Positive

Date Corpora- Criteria Criteria
tions
1 Dow Jones Sustainability Index Family Sep-99 350 0 22
2 Ethibel Global Index Family Jun-02 174 0 60
3 Ethical Index Family May-02 300 8 9
4 FTSE4GOOD Index Family Jul-01 875 4 16
5 Humanix 200 Index Family Jun-01 200 5 0
6 ASPI Eurozone Index Europe Jun-01 120 0 5
7 Ethinvest Environmental Index Australia Jun-96 174 3 5
8 Westpac-Monash Eco Index Australia Jan-99 75 0 4
9 Jantzi Social Index Canada Jan-00 75 9 5
10 Johannesburg Stock Exchange / Jun-02 75 0 30
FTSE4Good Index South Africa
11 Calvert CALVIN Social Index USA Apr-00 75 6 19
12 KLD Domini 400 USA May-90 400 11 27

The 12 indexes together list 202 positive criteria for CSR. These are management and per-
formance factors that the index managers believe are important for CSR and profitability. The
negative criteria apply in most cases to sectors that are undesirable, for example tobacco or nu-
clear power. A few of the indexes also include poor relative performance as a negative criteria.
Most of the indexes are new, in fact most of them were launched just before the market crash of
late 2000.

As noted earlier, the performance of the SRI indexes matches the market benchmarks. But
most of the indexes are relatively new and there is only short-term performance data. Thus it
does not seem helpful to include current values or changes in the indexes here. The informa-
tion is readily available in real time (more or less) from the website of the Social Investment Fo-
rum (www.socialinvest.org). The most important issue to understand about SRI performance,
including the SRI indexes, is that it appears to be competitive – it does not cost more to be nice,
and many investors want to be nice and will invest to support good CSR. This is the key realiza-
tion that has moved the market.

SRI and Market Performance: Academic Evidence

 11

Question: Does SRI result in improved returns for investors?

Answer: Yes, for certain kinds of SRI.

The academic research can be summarized:

• SRI funds do not under-perform the market as a group; there appears to be no additional
cost (besides fund fees) to being a socially responsible investor.

• SRI funds generally show lower volatility or Beta compared to unscreened funds, which
means they have reduced risk for investors and therefore might obtain higher long-term
returns. SRI funds also show lower turnover, which reduces fund management costs
and increases returns.

• The performance of SRI funds depends on the type of criteria and strategies they use;
funds with either a few criteria or with very detailed criteria do better than funds that are
“stuck in the middle” with a mid-range number of criteria.

• Environmental criteria are consistently correlated with higher returns. This is directly re-
lated to findings that companies that are leaders in environmental management and per-
formance show higher profits in their competitive groups than laggards.

• There is no academic evidence that social criteria in investment, or social performance

in companies, makes a difference one way or the other to profits and investment returns.
This appears to be due to the difficulty of defining “social performance”, which has many
permutations.

For most corporate managers, the more important point is, does social and environmental per-
formance help or hurt profits? This question has been investigated extensively in the last 15
years by many researchers, using many different approaches.

In the last few years there have been extensive literature reviews about the relationship be-
tween social and environmental performance and market value. Barnett and Salomon have re-
cently summarized the range of hypotheses as follows:18

• Being nice has a price

• Being nice pays
• Being nice is free (no significant effect)
• Being nice has its ups and downs

Barnett and Solomon provide extensive references to academic research that supports all four
positions - there is no clear answer in their opinion. They conclude that a major problem is the
wide variety of SRI criteria being used. They studied the differences in performance between
SRI funds, instead of the common approach of comparing SRI funds to “regular” funds. They
found that the performance of SRI funds relative to each other and to benchmarks depends on
the type and number of criteria used. Funds with a few screens, and funds with many detailed
screens and extensive analysis do better than funds that are “stuck in the middle”. In other

18
M. L. Barnett & Robert M. Salomon. 2002. “Unpacking social responsibility: The curvilinear
relationship between social and financial performance.” Academy of Management Best Paper
Proceedings.
 12

words, it is not possible to say whether being “socially responsible” helps or hurts without a very
careful definition of “social responsibility”.

In another recent review, Lao and Ganzi studied the performance of 105 profit-driven sustain-
ability funds and report that, largely because so many of the funds included in the study are
relatively new, that “Based on current data, it is still too early to confirm the positive, non-
existent, or negative correlation between profitability and social, ethical and environmental per-
formance.”19

There is more evidence that SRI at least does not hurt. As early as 1992, Hamilton et al con-
cluded that "[The] performance of [socially responsible] mutual funds is not statistically different
from the performance of conventional mutual funds."20 A number of authors have concluded
that SRI clearly does not impose negative costs on investors, and that there is no significant dif-
ference between the performance of screened and non-screened funds 21, 22 , 23 . Others have
found that some, but not all, SRI funds have better performance than the market,24 which sup-
ports Barnett and Solomon´s argument that it is the specific type of SRI criteria that make a dif-
ference.

Which SRI criteria do make a difference? The literature generally shows that environmental
performance is statistically linked to profitability. Russo and Fouts did an analysis of over 200
companies and their environmental and financial performance and found significant positive
linkages.25 Hart and Ahuja found that corporate investment in pollution prevention resulted in
increased profits.26 Dowell et al found that the use of a single set of global environmental man-
agement performance standards by corporations, compared to simple compliance with national
environmental standards, is correlated with increased market value.27

19
2001 Performance Review: Profit-Driven Sustainability Funds. Lou, C. and J. Ganzi, Envi-
ronment and Finance Enterprise, Chapel Hill, North Carolina. 2002.
20
S. Hamilton, et al., "Doing Well While Doing Good? The Investment Performance of Socially
Responsible Mutual Funds," Financial Analysts Journal, November-December 1993, p. 62.
21
Does Social Screening Affect Portfolio Performance? Diltz, David. Journal of Investing,
Spring 1995
Volume 4, Number 1, Pages 64 - 69
22
Socially Responsible Investment Screening: Strong Empirical Evidence of No Significant
Cost for Actively-Managed Value-Focused Portfolios. Stone, B. and J. Guerard, M.N. Gultekin,
G. Adams
23
Dhrymes, Phoebus J. "Socially Responsible Investment: Is It Profitable?" The Investment Re-
search Guide to Socially Responsible Investing, The Colloquium on Socially Responsible In-
vesting, 1998.
24
Socially Responsible Investing: Viable for Value Investors? Chung, D and L. Abramson, Jour-
nal of Investing, Fall 2000, Volume 9, Number 3, Pages 73 - 80
25
A Resource-Based Perspective on Corporate Environmental Performance and Profitability.
Russo, M. and P. Fouts. of Management Journal, 40(3),1997, 534-559.
26
Does it pay to be green?: An empirical examination of the relationship between emission re-
duction and firm performance". Hart, S. and G. Ahuja. Business Strategy and the Environment,
5: 1996, pp 30-37.
27
Dowell, G., S Hart and B. Yeung. “Do Corporate Global Environmental Standards Create or
Destroy Market Value?” Management Science, 2000, Vol 46: pp 1059-1074
 13

Dixon reviews the literature of environmental and stock price performance in the 1990s, and
finds that "most studies of links between corporate environmental and financial performance
found positive correlations."28 Feldman, et al., found that, as a firm improves its environmental
management system, the firm’s financial risk declines. The same holds true as the firm im-
proves its actual environmental performance. This reduces the firm´s cost of capital, which in-
creases its market value.29

Markets apparently respond to environmental performance news. Klassen and McLaughlin

found that good and bad environmental news about public companies significantly affected their
market value.30 Dasgupta et al found the same results from some developing countries and
concluded that “in numerous circumstances market forces...have not remained idle upon receiv-
ing signals of the environmental performance of firms."31 Thus environmental performance ap-
pears to be one kind of SRI criteria that does relate to market value.

What about social criteria? There are no studies that demonstrate a positive correlation specifi-
cally between social performance and market performance, because as is widely observed, so-
cial performance is difficult to define into specific variables. More generally, the research has
focused on “corporate citizenship” or ethics. A recent report from the Conference Board con-
cludes that citizenship impact on the bottom line can be demonstrated in specific instances and
not at all in others, but that in any case, it can be generally shown not to harm shareholder
value.32 Another study of companies with formal policies of ethical behavior claims to show that
they perform better than those without formal ethics policies.33 However these policies include
both social and environmental criteria, making it impossible to tell which specific criteria are
most responsible for performance.

There is one study that examines SRI investment internationally. Travers discusses interna-
tional socially responsible investing (SRI), focusing on managed portfolios that invest in firms
that pass a screening test.34 He finds that international portfolios formed using social screens
offer competitive returns when compared with unrestricted international portfolios.

28
Dixon, Frank. "Financial Markets and Corporate Environmental Results." Innovest Working
Paper, 2002. Innovest Inc., New York.
29
Stanley J. Feldman, Peter A. Soyka & Paul G. Ameer, "Does Improving a Firm's Environ-
mental Management System and Environmental Performance Result in a Higher Stock Price?",
The Journal of Investing, Winter 1997, p. 87.
30
The Impact of Environmental Management on Firm Performance. Klassen, R.D and C. P.
McLaughlin, Management Science, 42:8, 1996
31
Dasgupta, Susmita , Benoit Laplante, Nlandu Mamingi. "Capital Market Responses to Envi-
ronmental Performance in Developing Countries." The World Bank Development Research
Group, 1998.
32
The Link Between Corporate Citizenship and Financial Performance. Stephen Garone, S.
The Conference Board, New York 1999.
33
A Study of the Link Between a Corporation's Financial Performance and its Commitment to
Ethics", Verschoor, C. 1998. Journal of Business Ethics 17:1509
34
Frank J. Travers, "Socially Responsible Investing on a Global Basis: Mixing Money and Mo-
rality Outside the U.S.", The Journal of Investing, Winter 1997, p.50.
 14

Another review of the literature on responsibility and profits was conducted in 2003 by a group
of European SRI oranizations: 35

“Hamilton, Jo and Statman (1993) and Statman (2000) compared the returns of ethical
and non-ethical US funds to each other and to both the S&P 500 and the Domini Social
Index (DSI), the oldest socially screened index, and concluded that there was no signifi-
cant difference between risk-adjusted returns for ethical and non-ethical funds. In the UK
market, early studies by Luther, Matatko, and Corner (1992) comparing ethical funds to
market-wide indices like the FT all-share index even provided some (arguably weaker)
evidence that ethical funds tend to outperform general market indices.

More recent studies using more refined methodology, such as those of Gregory, Matatko
and Luther (1997), found no significant difference between the financial performance of
ethical and non-ethical unit trusts. Another recent study by Bauer, Koedijk, Otten (2002)
documented the theory that ethical funds in both the US and in Germany went through a
‘learning phase’ of significant under-performance in the beginning of the 1990s before
beginning to match the performance of conventional funds in the late 1990s and early
2000s. Another group of studies have analysed the style biases of ethical funds, for ex-
ample the UK SRI market’s bias towards smaller companies. Some US studies have
also attributed the good performance of the DSI index to sector and style biases. Dibar-
tolomeo (1996), Guerard (1997) and Kurts (1997), for example, claim that the perform-
ance of the DSI couldn’t be attributed to the effect of companies’ social responsibility
policies but rather on the index’s bias towards large-growth companies (those with
higher price to earnings/book/cash flow ratios based on their expected future growth).

In conclusion, existing empirical evidence suggests that ethical screening leads to a fi-
nancial performance very similar to that of comparable unrestricted portfolios.”

In summary, academic studies suggest that SRI criteria do not hurt investment performance,
and can even reward it, especially if the criteria include significant environmental elements.

Of course there are many issues for debate. For example, our review of the sector holdings for
SRI funds in this investigation show that they are heavily weighted to the financial and technol-
ogy sectors and have relatively small investments in sectors with significant CSR concerns,
such as mining, forestry, petroleum and chemicals, or manufacturing. In other words they are
using a sector portfolio strategy that reduces CSR risk. Further research should examine
whether SRI is competitive when it is focused only on the high-risk sectors where responsibility
is actually most important.

Academic study of SRI and CSR is supported by numerous networks, institutions and academic
journals. As primary research in this area continues to accumulate there will be more “meta-
analyses”, or summaries of research, such as those presented here. Persons interested in the
debate about CSR and profits should watch for these reports as they are milestones in the road
to understanding.

35
CSRE 2003. The SRI Compass Funds Feature - Issue 2: Performance and risk return behav-
ior of SRI funds. CSR Europe, Brussels.
 15

SRI and Market Performance: Market Evidence

Most academic studies of SRI use real market data. But it is helpful to also see the current re-
sults of SRI from the markets. These results of course have been affected by the global eco-
nomic downturn from 2001-2003. It is also important to remember that most SRI funds are rela-
tively new. So almost every fund has lost value in the last 3 years. This means that SRI fund
performance should be judged relative to market benchmarks. The data included here are in-
tended to give a general overview. Since market performance changes by the minute and the
performance of any fund or index generally reflects overall market conditions, we see little value
in commenting on the performance of individual funds or indexes. Summary information is pre-
sented here.

Figure 5 shows the performance of European SRI funds vs. the Financial Times Stock Ex-
change All-Share Index Performance.36 The funds performed in line with the benchmark, with
some tendency to a small amount of improved performance. This graph runs only until 1999 but
it is useful to see the correlation of performance.

36
Socially Responsible Investment by Pension Funds: A State-of-the-Knowledge Report.
Sturm, A. and M. Badde. 2001. Ellipson Ltd for the International Labour Organisation
(ILO)/Employment Sector/Social Finance Unit, Geneva.
 16

Figure 3: Performance of European SRI Funds vs the FTSE All-Share Index Performance

Figure 6 shows the performance of the Dow Jones Sustainability Index vs. the Dow Jones
Global Index, using a back-cast analysis (the index was launched in 2001). The Sustainability
Index outperforms the Global Index through the period covered. This is an example of one in-
dex; as of March 2004, all of the SRI indexes show performance quite similar to their market
benchmarks of unscreened funds.

Figure 4: Performance of the Dow Jones Sustainability Index

- this figure will be updated in final version

 17

The performance of four leading SRI index funds compared to their market benchmarks as of
June 2002 is shown in Figure 7. Five-year performance was quite good. Three-year perform-
ance was mixed as of June 2002. The FTSE4Good and Domini indexes had large holdings in
telecommunications stocks such WorldCom and consequently saw a significant loss of value
from that sector after its market collapse in late 2000.

Figure 5: Performance of Some SRI Indexes 37

The current performance of SRI mutual funds in the US appears to be quite good. In January
2004 the US Social Investment Forum (SIF) reported on the performance of USA SRI funds:

“A total of 62 percent of the full universe of social funds earn highest ratings from either
the Lipper or Morningstar fund rating companies. Of the 53 socially screened funds with
a three-year performance record tracked by the Social Investment Forum, 33 (62 per-
cent) received the highest marks from Lipper or Morningstar. According to the Forum, 26
(49 percent) of the funds tracked received an "A" or "B" ranking from Lipper based on
one- and/or three-year total returns within their investment categories. A total of 20
screened funds (37 percent) earned either four or five stars from Morningstar for at least
three-year risk-adjusted performance. A number of the funds earned top rankings from
both organizations. Both the Lipper and Morningstar analyses are based on time periods
ending December 31, 2003.

Socially responsible indexes were neck-and-neck with the S&P 500 both during 2003
and on a total returns basis for 10 years. For the year ending December 31, 2003, the
Domini 400 Social Index (DSI 400) showed a gain of 28.47 percent, while the S&P 500
rose 28.66 percent over the same period. For the 10-year period ending December 31,
2003, the DSI 400 gained 11.86 percent while the S&P posted an 11.07 percent gain.”38

The performance of SRI funds in Europe was reported in late 2003 by CSREurope:

“This funds feature has attempted to analyse some overall trends on the performance of
some of the biggest European SRI funds over the past three years relative to the

37
ASRIA 2002. SRI and Pensions in Asia. Association for Socially Responsible Investment in
Asia, Hong Kong.
38
News Release: January 27, 2004. The Social Investment Forum, Washington DC.
 18

risk/return behaviour of the markets in which they invested, and has found no major be-
havioural differences compared to “traditional” funds. Furthermore, this feature has also
highlighted that the range of socially responsible funds available in Europe should today
be able to satisfy each potential investor’s personal risk/return preferences, thereby al-
lowing everyone to choose a product in line with their own expectations.”39

The SRI market is growing very quickly so there are many concerns about evaluating perform-
ance at this time. However, there is no question about one thing: The number of investment
professionals who believe that SRI adds value is increasing rapidly, and the amount of money in
SRI funds is increasing rapidly. In the best spirit of investor-based economics, we suggest that
academic evidence is less convincing than the clear conclusion of the market that CSR adds
value.

Reporting CSR Performance to Investors

Since SRI began, fund managers and analysts have asked corporations for more information
about CSR performance. At the same time, NGOs and the public are also asking for more in-
formation about CSR performance. This has created an international movement among SRI
fund managers, NGOs and major corporations to design standards for corporate public reports
about social responsibility. Investors and activists will no longer accept general platitudes about
corporate citizenship – they want to see the performance data, both good and bad.

The Global Reporting Initiative (GRI) is an international group that produces what are now the
most respected international guidelines for public reporting on CSR and sustainability perform-
ance. The GRI is more of a network than a NGO. Its guidelines are developed with extensive
input from many stakeholders, including leading investment companies. More investors are be-
coming aware and responsive to the GRI, and at a recent count more than 400 companies use
the GRI for their performance measurement and reporting.40

The GRI reporting guidelines are quite detailed. The structure of the GRI report is:

39
CSRE 2003. The SRI Compass Funds Feature - Issue 2: Performance and risk return behav-
ior of SRI funds. CSR Europe, Brussels.
40
GRI 2004. Global Reporting Initiative website, March 30 2004.
http://www.globalreporting.org
 19

Table 2: Structure of the GRI Sustainability Reporting Guidelines

GRI Report Content

Vision and Strategy
Profile
Governance Structure and Management Systems
GRI Content Index
Performance Indicators
Economic Performance
Environmental Performance Indicators
Social Performance Indicators

All of the sections have sub-sections. The criteria for reporting are quite detailed. Figure 5
shows the subjects which the GRI suggests should be included in a good CSR report that satis-
fies investors, among others. The CSR criteria of the GRI show a strong correlation with the
CSR criteria used by the Dow Jones Sustainability Index. This should not be a surprise since
both organizations participate in the same international networks for best practice in SRI.

The criteria of the GRI are quite detailed. They provide another source of guidance about the
CSR criteria valued by the SRI market because the GRI is strongly influenced by the information
needs of investment fund managers. Figure 8 shows the reporting indicators recommended by
GRI.
 20

Figure 6: CSR Performance Reporting Indicators Recommended by the Global Reporting

Initiative

The GRI criteria continue to evolve. Recently the GRI released technical CSR guidelines for
several sectors, including the financial sector.

The GRI is an example how reporting creates a cycle of development for SRI criteria in general.
Companies will follow the GRI and other guidelines and report their CSR performance to inves-
tors, who will evolve their SRI criteria a little more then suggest to GRI how to improve the Re-
porting Guidelines and CSR criteria. Figure 9 shows this cycle and how research on CSR sup-
ports investment and guidelines.
 21

Figure 7: Cycle of Development for Corporate Social Responsibility and Socially Re-
sponsible Investment

Socially Responsible
Investment Funds and Indexes

Public CSR CSR Reporting

Reporting CSR Research Guidelines

Company CSR
Programs
 22

Chapter 2. Trends in Socially Responsible Investment

Quality

Quality management (QM) as a skill for companies was pioneered by Edward Deming in the
USA in the 1950s. His ideas were adopted in Japan in the 1960s and are widely credited for the
expansion of Japanese exports from the late 1960s. In fact in Japan the national quality award
is called the Deming award.

In the USA the federal Department of Commerce set out to promote quality as a competitive
force for US industry. In 1987 the National Institute of Standards and Technology (NIST) estab-
lished the Malcolm Baldrige National Quality Program and a national contest for quality. NIST
created an advisory group of experts in quality and management and produced detailed guide-
lines for assessing quality in organizations. The program quickly grew and the guidelines are
revised every year and now in 2004 the guidelines are called “Criteria for Performance Excel-
lence.” Organizations, including companies or non profit organizations, follow the criteria to de-
scribe in great detail their processes, measurements and results for performance.

The growth of the quality movement coincided with the development of guidelines for Environ-
mental Management Systems (EMS). The ISO 14000 series of environmental management
standards were launched in the early 1990s. The ISO 14001 standard for EMS was partly mod-
eled on the ISO 9000 standards for quality management. ISO 14001 uses the same Plan-Do-
Check-Act cycle for continuous improvement and focuses on the organizational processes
needed for effective environmental management. Various authors developed guidelines for To-
tal Quality Environmental Management to show how the concepts can be integrated. In 1994
the Global Environmental Management Initiative (GEMI), a consortium of major US corporations
focused on Environment, Health and Safety, published “Total Quality Environmental Manage-
ment – The Primer”. This short manual shows how to use the classic TQM tools, such as proc-
ess maps, run charts, cause and effect diagrams, and others to improve EHS performance.
Most of the GEMI companies claim to use this approach in EHS.

The potential application of the Baldrige quality criteria to environmental management was rec-
ognized quite quickly. In the early 1990s the Council of Great Lakes Industries, an association
of large companies around the Great Lakes region of the USA, developed and experimented
with an EMS model based on the Baldrige system. The model uses the same seven major
categories for performance measurement and describes a “ladder” of best practices for each
one, to help companies increase their performance in each category.41 Companies such as Ko-
dak experimented with the model, in fact the Kodak efforts are described in a business school
teaching case study.42

41
Wever, 1996. Strategic Environmental Management. G. Wever. John Wiley and Sons, New
York.
42
WRI 1998. Total Quality Environmental Management at Kodak. World Resources Institute,
Washington DC.
 23

Dr. Robert Pojasek at Harvard University is a leading advocate of the Baldrige model for envi-
ronmental management. 43, 44 He helped the formation of the first state program for environ-
mental quality improvement based on Baldrige. The New Mexico State Government developed
the Green Zia program. This is a state assistance and recognition program that helps compa-
nies with environmental quality management and uses a similar evaluation process based on
Baldrige to give annual awards to the best performers. The program is oriented to smaller com-
panies, but large organizations such as Lawrence Livermore National Laboratory of the US De-
partment of Energy also report excellent results using the program. Because of the large Latino
population in New Mexico the program has produced most of its publications and guidance in
Spanish as well as English.

All of this activity has been of great interest to the advisors to the Baldrige National Quality Pro-
gram. They have continually improved the integration of CSR into the criteria for quality and
performance excellence in the Baldrige program. It is specifically included as one of the two
major sub-categories for Leadership, as shown in Table 3.

Table 3: Social Responsibility Assessment in the Baldrige Quality Award 45

(Words in CAPITALS are specifically defined in the Guidelines)

Describe HOW your organization addresses its responsibilities to the public, ensures
ETHICAL BEHAVIOR, and practices good citizenship. Within your response, include an-
swers to the following questions:

a. Responsibilities to the Public

1. HOW do you address the impacts on society of your products, services, and operations?
What are your KEY compliance PROCESSES, MEASURES, and GOALS for achieving and
surpassing regulatory and legal requirements, as appropriate? What are your KEY
PROCESSES, MEASURES, and GOALS for addressing risks associated with your products,
services, and operations?

2. HOW do you anticipate public concerns with current and future products, services, and
operations? HOW do you prepare for these concerns in a proactive manner?

b. ETHICAL BEHAVIOR
HOW do you ensure ETHICAL BEHAVIOR in all STAKEHOLDER transactions and interac-
tions? What are your KEY PROCESSES and MEASURES or INDICATORS for monitoring

43
Pojasek 2000. Lessons Learned and the Baldrige Model for Environmental Excellence.
R.Pojasek, Journal of Environmental Quality Management, Spring 2000. John Wiley and Sons,
New York.

44
Pojasek 2000. Striving for Environmental Excellence with the Baldrige Model. R.Pojasek,
Journal of Environmental Quality Management, Summer 2000. John Wiley and Sons, New
York.
45
NIST 2003. Criteria for Performance Excellence. USA National Institute for Standards and
Technology, Baltimore, Maryland.
 24

ETHICAL BEHAVIOR throughout your organization, with KEY partners, and in your
GOVERNANCE structure?

c. Support of KEY Communities

HOW does your organization actively support and strengthen your KEY communities? HOW
do you identify KEY communities and determine areas of emphasis for organizational in-
volvement and support? What are your KEY communities? HOW do your SENIOR
LEADERS and your employees contribute to improving these communities?

The Baldrige criteria promote integration of quality elements throughout the system. It is impor-
tant to include here the guidance for integration of social responsibility into other process areas.

• “N1. Societal responsibilities in areas critical to your business also should be ad-
dressed in Strategy Development (Item 2.1) and in Process Management (Category
6). Key results, such as results of regulatory and legal compliance or environmental
improvements through use of “green” technology or other means, should be reported
as Governance and Social Responsibility Results (in Item 7.6).
• N2. Measures or indicators of ethical behavior (1.2b) might include the percentage of
independent board members, measures of relationships with stockholder and non-
stockholder constituencies, and results of ethics reviews and audits.
• N3. Areas of community support appropriate for inclusion in 1.2c might include your
efforts to strengthen local community services, education, and health; the environ-
ment; and practices of trade, business, or professional associations.
• N4. The health and safety of employees are not addressed in Item 1.2; you should
address these employee factors in Item 5.3.

An integral part of performance management and improvement is proactively addressing

(1) the need for ethical behavior, (2) legal and regulatory requirements, and (3) risk fac-
tors. Addressing these areas requires establishing appropriate measures or indicators
that senior leaders track in their overall performance review. Your organization should be
sensitive to issues of public concern, whether or not these issues are currently embod-
ied in law. Role model organizations look for opportunities to exceed requirements and
to excel in areas of legal and ethical behavior.”

It is very important to recognize the message being sent by the Baldrige program about social
responsibility. It is something that can and should be measured and managed as an organiza-
tion process, not as philanthropy. It is tightly integrated into related with other processes, par-
ticularly those for governance and for employee management and performance. The point is
that social responsibility is about professional management, not just ethics and charity.

This perspective is being transmitted around the world through national quality programs. At
least 77 countries now have national quality programs. The Baldrige program is the model for
most of them, including in Peru. The Deming Award in Japan and the European regional quality
award are also used as models.46 Of course the three leading programs share their perspec-

46
APO 2002. National Quality and Business Excellence Awards: Mapping the Field and Pros-
pects for Asia. In Proceedings, The Quest for Global Competitiveness Through National Quality
and Business Excellence Awards. Asian Productivity Organization, Tokyo.
 25

tives, and social responsibility is being firmly integrated into the measurement of organization
excellence around the world.

This is strongly reinforcing the movement in SRI to measure CSR at the process level in organi-
zations as a basis for investment decisions. The Baldrige criteria do not let companies get away
with simple codes of conduct or philanthropy as a basis for CSR. And SRI fund managers are
also not accepting such simplistic gestures. They are looking for results that indicate the quality
of professional management and integration of CSR into the basics processes of the organiza-
tion. It is vital that companies hear this message, otherwise they will not be competitive in qual-
ity or investment.

Banking

Banking is probably more important than market investing to promote CSR. People have direct
relationships with their banks but usually not with the companies in which they invest. Many
people have market investments, but almost every working adult in developed countries has a
bank. If the objective is to promote more sustainable finance then banks should be encouraged
to use environmental and social risk evaluation when making loans. More importantly, banks
should learn the lesson of SRI that CSR adds business value. Banks can help themselves and
help their clients if they promote good practices in CSR to their clients.

Environmental risk has been a concern of banks in North America and Western Europe for
many years because of liability for cleaning up contaminated property that was used as collat-
eral and that becomes bank property when mortgage or loan holders default. Already most
banks in the USA conduct environmental evaluations for transactions involving property, manu-
facturing or chemicals. There is extensive literature about managing environmental liability risk
in banking.47 Social risk has not been a significant issue for banking in developed countries but
it is rapidly becoming a concern in developing countries and emerging markets.

Between 2000 and 2003 there has been a surge in analysis of CSR in banking. Hess provides
a good introduction to the Business Case for Sustainability for the financial services sector.48
Other overviews of sustainability and CSR in banking include Sustainable Banking: The Green-
ing of Finance, 49and Sustainable Banking and Finance.50 These books describe the state of
the art, trends and case studies.

Sustainable banking is the focus of several international initiatives. The United Nations Envi-
ronment Programme Finance Initiative 51 targets the banking and insurance sectors, and is in-
creasing its focus on SRI. The UNEPFI sponsors two statements of principles. The Banking

47
Case 2001. Environmental risk management and corporate lending - a global perspective. P.
Case. Woodhead Publishing Ltd.
48
Hess 2003. The Business Case for Sustainability: Financial Services Sector Report. H.J.
Hess, Forum for Corporate Sustainability Management, International Institute for Management
Development. Lausanne
49
Boum, J. 2002. Sustainable Banking: The Greening of Finance. Greenleaf Publishing, Lon-
don
50
Jeucken, M. 2001, Sustainable Finance and Banking. Earthscan Publications, London.
51
http://www.unepfi.net
 26

Charter for Sustainable Development has been signed by over 200 banks around the world.
The Insurance Charter for Sustainable Development has been signed by XX insurance compa-
nies. UNEPFI holds annual conferences around the world where financial companies and oth-
ers report and debate issues in sustainability and CSR.

The World Business Council for Sustainable Development has a program on the finance sector.
The 11 banks in the project have released a statement of principles on sustainable manage-
ment. It reads in part:

Integrating sustainable development into our business is a prerequisite for the continu-
ous success of our companies, as well as for creating long-term shareholder
value. Shareholder value is a crucial yardstick for measuring economic success, and by
taking the environmental and social aspects into account when conducting our business,
we can reduce risks further improving our bottom-line and creating long-term value.
What is more, society and the environment will both benefit if risks are managed more
effectively. Through financial services and innovative products, we are able to promote
socially and environmentally responsible investments.52

The most productive organization in banking and CSR is the International Finance Corporation
(IFC), the private sector investment member of the World Bank Group. The IFC acts like a
commercial bank and gives loans to companies and projects around the world. It has been
conducting training in environmental risk analysis for financial institutions in emerging markets
for over 10 years. Since 1997, over 375 managers from 275 financial institutions and 45 nations
have participated in the IFC’s Competitive Environmental Advantage work-shop series. 53

IFC has produced extensive guidelines for managing social and environmental risk of loans in
developing countries. They cover environmental assessment, resettlement, human rights,
community relations and more. In Measuring Sustainability: A Framework for Private Sector
Investments, 54 the IFC presents a system for quantitative and qualitative assessment of risk
and best practices for lending. The system addresses public and private corporations, and
small and large companies.

In 2003 the IFC and a group of leading banks in international project finance announced the
Equator Principles. The banks committed to a formal procedure (the Principles) for following the
IFC and World Bank guidelines on social and environmental risk assessment and management.
By March 2004, 22 banks had signed the Principles. They account for more than 50% of the
infrastructure financing in the world, according to the IFC. The Principles state,

“We (signatory banks) believe that adoption of and adherence to these principles of-
fers significant benefits to ourselves, our customers and other stakeholders. These prin-
ciples will foster our ability to document and manage our risk exposures to environ-
mental and social matters associated with the projects we finance, thereby allowing us to
engage proactively with our stakeholders on environmental and social policy issues. Ad-
herence to these principles will allow us to work with our customers in their management

52
WBCSD 2002. Statement by CEOs and Chairmen in the Finance Sector. World Business
Council for Sustainable Development, Geneva.
53
IFC 2003. Beyond Risk. International Finance Corporation, Washington DC.
54
IFC 2003. Measuring Sustainability: A Framework for Private Sector Investments. Interna-
tional Finance Corporation, Washington DC.
 27

of environmental and social policy issues relating to their investments in the emerging
markets.” 55

Guidelines for CSR in banking are produced by a number of other organizations. The most im-
portant are described briefly here because they are new and useful to banks immediately. All
are available for download from the websites of their publishers.

Measuring Sustainability: A Framework for Private Sector Investments. 56

This technical manual presents major categories for CSR and sustainability and a scale
of performance for each one. It helps the investor evaluate risk and also helps them
show a potential client where there are clear opportunities for improvement. It combines
evaluation with best practices. The IFC publishes numerous other guides on sustainable
finance, most of which can be downloaded from the IFC website.

Environmental, Social, Health and Safety Risk Management Manual for Financial Institu-
tions. 57
Produced by the Inter-American Development Bank in 2003, this technical manual inte-
grates these four topics in a practical framework for portfolio management. It provides
details how to identify these CSR risks, integrate them into the general risk management
framework, and mitigate risks.

Guidelines on Environmental Management and Reporting for the Financial Services Sec-
tor: A Practical Toolkit. 58
This was produced in 2001 by the FORGE consortium of leading financial institutions in
the UK. The Guidelines provide an implementation toolkit that seeks to enable wider
and more consistent engagement in environmental management and reporting across
the sector. Building upon the experience of many financial services organizations, the
Guidelines highlight why environmental management and reporting is an important part
of corporate governance. The Guidelines identify the business activities that create key
environmental issues for the sector. It gives step-by-step guidance for developing man-
agement processes such that environmental risk can be avoided, governance standards
met and business opportunity realized.

Environmental Performance Indicators for the Financial Industry 59 and

Social Performance Indicators for the Financial Industry 60

These two technical guidance manuals were developed by a consortium of European fi-
nancial institutions. They are workbooks for the financial industry to better communicate
and benchmark its environmental performance using a common set of management and

55
IFC 2003. The Equator Principles.
56
IFC 2003. Measuring Sustainability: A Framework for Private Sector Investments. Interna-
tional Finance Corporation, Washington DC.
57
IADB 2003. Environmental, Social, Health and Safety Risk Management Manual for Financial
Institutions. Inter-American Development Bank, Washington DC.
58
FORGE 2001. Guidelines on Environmental Management and Reporting for the Financial
Services Sector: A practical toolkit.
59
http://www.epi-finance.org
60
http://www.spifinance.org
 28

operational performance indicators that are relevant for the sector. The reports present
the results of a study that a group of leading German and Swiss financial institutions and
insurance companies has undertaken to harmonise reporting practices of their sector
and to facilitate benchmarking. The initiators – practitioners from both global and re-
gional providers of financial services – intend to share their current state of progress with
the interested public in order to support other institutions in their reporting practice and
financial analysts and investors to better assess the performance of financial ser-
vice providers.

Financial Services Sector Supplement: Social Performance

This technical guidance manual was produced by a group of ten financial institutions for
use with the 2002 Sustainability Reporting Guidelines of the Global Reporting Initiative.
It is applicable to banks and insurance companies and provides specific technical indica-
tors for CSR management and reporting.61

A Benchmarking Study: Environmental Credit Risk Factors in the Pan-European Banking

Sector.
ISIS is a leading European investment manager with 100 billion euro under manage-
ment. It manages its equity portfolio according to a process it developed called the Re-
sponsible Engagement Overlay. ISIS commissioned this survey of European and Eng-
lish banks in 2003 to identify the practices and trends for environmental risk manage-
ment. It shows what leading banks are doing now about environmental operations and
risk management. 62

Most of this CSR guidance for banks is so new that it has not be analyzed in the academic lit-
erature. In time there will probably be a synthesis of them and the financial community will gen-
erally agree to a standard, and very detailed, set of principles and best practices for CSR.
Meanwhile banks anywhere can greatly benefit from these sources.

Banks are also major investors. Some of the major European banks are using SRI principles.
Some are offering SRI funds. We should expect that banks will continue to be major forces in
the growth of SRI because they can benefit from it in their products and their treasury invest-
ments.

This has been a brief overview of some of the developments in sustainable finance that are
relevant to commercial banks. There is much more happening but it receives relatively little at-
tention in the mainstream banking publications. The lack of information can actually harm
banks; they can get clear guidance now and avoid pending problems, but they don’t know it.
This has a clear implication for banking associations and regulatory agencies. They should
have a point of contact and expertise in the resources for CSR in banking that are currently
available. Then they need to educate their members. All the resources described above are
available as free electronic documents. A bank association can e-mail them to all their mem-
bers within minutes. But personal orientation at the executive level is needed for a bank to use
the resources. Many bank associations have regular training programs. The CSR guidelines
described here can easily be used to design and deliver a training course for bankers.

61
GRI 2003. Financial Services Sector Supplement: Social Performance. Global Reporting Ini-
tiative, Boston.
62
ISIS 2002. A Benchmarking Study: Environmental Credit Risk Factors in the Pan-European
Banking Sector. ISIS Asset Management, Brussels
 29

SRI funds already know that banks are important for CSR and that banks with good CSR pro-
grams are more profitable. Our review of SRI fund investment indicates that the financial sector
is in fact one of the largest sector holdings of all funds (the other is high-tech). We do not know
if the high weight of financial stocks in SRI portfolios is because they are selected more for CSR
or profitability. But clearly the role of banks in CSR and SRI is important and needs to be inte-
grated into any program to promote CSR or SRI.

Corporate Governance

Corporate governance is now a significant criteria for many SRI funds. Governance is consid-
ered a mark of social responsibility, especially after the governance disasters in large firms in
the US and Europe from 2001-2004 and the passing of the Sarbannes-Oxley act in the USA to
strengthen corporate governance. Good governance also appears to improve profitability.

Since the late 1980s CalPERS, the California public pension fund, has had in place a series of
corporate governance principles guiding its investments. Since 1987 the fund has signaled
out “Focus Companies” which are the poorest relative performers on corporate governance.
These companies receive the brunt of CalPERS corporate governance activism. The effects of
this campaigning – now known as the “CalPERS Effect” – have been extensively documented.
A Wilshire Associates study of the “CalPERS Effect” of corporate governance examined the per-
formance of 95 companies targeted by CalPERS between 1987 to 1999. Results indicate that,
while the stock of these companies trailed the Standard & Poor’s 500 Index by 96 percent in the
5-year period before CalPERS acted, the same stocks outperformed the index by 14 percent in
the following five years, adding approximately $150 million annually in additional returns to
CalPERS. 63

In 2001, CLSA Emerging Markets, the Hong Kong-based emerging-market investment bank,
released a report on corporate governance in emerging markets entitled Saints and Sinners:
Who’s Got Religion. The hypothesis was that emerging market companies with strong corpo-
rate governance would have stocks that outperformed their weak corporate governance coun-
terparts. This theory was strongly supported by performance data for one, three and five years
through 2000. In 2002 CLSA, updated the report in a new paper, entitled Make me Holy… But
not Yet and largely had the same results. Their findings:

In Asia, companies in the top quartile based on corporate governance, outperformed

their respective country indexes in nine out of ten markets under CLSA coverage in
2001. Over the past five years, the average outperformance of the top quartile in each
Asian market was 147 basis points. Likewise in Latin America, top corporate governance
companies outperformed their peers by 111 basis points in 2001 and by 102 basis points
over the past five years. This outperformance appears to apply not just at the company
level, but also at the market level: CLSA found that over the past five years the markets
in the bottom half of their corporate governance rankings fell by 37.8%, double the aver-
age 19.2% decline of the markets in the top half. CLSA’s corporate governance rankings
are based on company ratings on 57 issues that are grouped into seven
main categories: (i) financial discipline, (ii) transparency, (iii) board independence, (iv)

63
IFC 2003
 30

Board and Director accountability, (v) management responsibility, (vi) fairness and
treatment of minorities; and (vii) social awareness, including labor and environmental is-
sues. 64

In Brazil, the national stock exchange BOVESPA recently created a special corpo-
rate governance index, the IGC, weighted to favor three increasingly stronger levels of commit-
ment to corporate governance. In March 2003, the IGC not only outperformed the BOVESPA
index and other Latin American stock market indices, it even beat the Dow, the S&P 500, and
the NASDAQ. In the first quarter of 2003, the IGC also outperformed most other regional in-
dexes. A study by Gledson de Carvalho also showed that Brazilian companies with stronger
commitment to corporate governance experienced not only rapid stock value increases, but also
greater negotiating volumes and increased liquidity. 65

The International Corporate Governance Network (ICGN) represents many of the largest institu-
tional investors – pension funds – in the world. The ICGN Statement on Institutional Share-
holder Responsibilities sets out a framework of best practices on the implementation of fiduciary
responsibilities in relation to equity shareholdings. As such it is meant to apply to institutional
shareholders and their agents around the world. The Statement says,

“It is clear that institutions risk failing to meet their responsibilities as fiduciaries if they
disregard serious corporate governance concerns that may affect the long-term value of
their investment. They should follow up on these concerns and assume their responsibil-
ity to deal with them properly. Such concerns may, for instance, relate to [various gov-
ernance topics and] - The management of environmental, ethical and social risks.”66

Again we see a strong convergence of important trends:

• Corporate governance is now recognized as a critical element for government regulation of

markets.
• Governance is defined by leading authorities to include CSR.
• SRI investors have noticed a correlation between governance and profitability. Since gov-
ernance also matches the SRI mission of social responsibility, governance is increasingly
being used as a criteria for SRI.
• Companies of any kind, particularly public companies, that want to attract SRI will need to
focus on improving their governance to meet international standards.

Pension Funds

Institutional investors funds, particularly including pension and retirement funds that are regu-
lated by government, are the largest investment funds in the world. They are starting to use SRI
principles. This is being driven by the belief in SRI market performance, by the CSR values and
programs of some funds, and by new government regulations affecting pension funds in
Europe.

64
IFC 2003.
65
IFC 2003
66
ICGN 2003. Statement on Institutional Shareholder Responsibilities. International Corporate
Governance Network (ICGN) represents many of the largest institutional investors – pension
funds – in the world. The
 31

“Growing evidence indicates that pension funds and similar retirement systems have taken a
leading role in developing the European SRI market. And everything points to this influence in-
creasing in the future. As the pension fund market continues its growth in Continental Europe,
trade unions are taking an increasingly active role in institutional SRI. In many countries, unions
have an important say in how pension money is managed, and their interest in this area is con-
tinuing to develop. Another relevant element is the fact that pension funds have a long-term
view for assessing their returns. This fits the argument that SRI concerns along with sound cor-
porate governance would enhance long-term company performance. Finally, it is fairly well
known that SRI has been led not by debt instruments, but through the equities markets. It is sig-
nificant that the weight of equities in overall pension investment still differs greatly from country
to country across Europe. SRI will move into multiple asset classes as pension funds and other
institutions increasingly diversify their equity and debt ratios.” 67

In 2001 the International Labour Organization in Geneva published a major review titled: So-
cially Responsible Investment by Pension Funds: A State-of-the-Knowledge Report.68 This pa-
per provides extensive background about the design, regulation and investment of pension
funds, and how their members can act to influence investment policies. Readers are referred to
this report for details on this topic. The report concludes that SRI has great promise for pension
funds but the number of SRI funds is too small for pensions to use them significantly. However,
the research for the report was concluded in 2000, just before major policy changes to promote
SRI in pensions were introduced in Europe and before the introduction of most of the SRI mar-
ket indexes. We feel the potential for SRI in pensions is now much greater.

As populations in developed countries have aged, the assets in state pension funds have grown
enormously. The Organization for Economic Cooperation and Development provides extensive
information about the scope, state and prospects for pension funds around the world and con-
firms their dominance in stock markets.69 After commercial banks and mutual funds, pension
funds represent the third largest global pool of private capital available for lending or investment
purposes.70

SRI has been used in some way by many pension funds over the years. The most common
form is negative screening, particularly for tobacco. Many pension funds will not invest in the
stocks of tobacco firms. But there has been a historical reluctance by pension funds to apply
any more CSR criteria because of the “prudent man” rule.

The rule, which is now followed by most institutional investors around the world, was first set
forth by a Massachusetts judge, Samuel Putnam, in 1830. It states:

“All that can be required of a trustee to invest, is, that he shall conduct himself faithfully
and exercise a sound discretion. He is to observe how men of prudence, discretion, and
intelligence manage their own affairs, not in regard to speculation, but in regard to the

67
EuroSIF 2004. SRI and Pension Funds in Europe. CEO Magazine, January 2004.
68
ILO 2001. Socially Responsible Investment by Pension Funds: A State-of-the-Knowledge
Report. International Labour Organization, Geneva.
69
OECD 2000. Insurance and Private Pensions Compendium for Emerging Economies. Or-
ganization for Economic Cooperation and Development, Paris
70
WRI 1998. Leverage for the Environment: A Guide to the Private Financial Services Indus-
try. World Resources Institute, Washington DC.
 32

permanent disposition of their funds, considering the probable income, as well as the
probable safety of the capital to be invested.”

In the late 1800s, this rule was interpreted to mean that trustees could not speculate and they
could not invest in stocks, property, or any investment that might depreciate in value. Indeed by
the 1850s most U.S. states had lists of permissible and non-permissible investments. Beginning
in the 1950s, however, the concept of prudence began to evolve to take into consideration the
overall risk and return of a portfolio and the need to diversify investments in-stead of focusing
solely on the risk and return of each particular investment.

With the overwhelming acceptance of portfolio theory in economics, the late 1970s saw severe
criticism of the prudent man rule throughout the U.S. Shortly thereafter, the Department of La-
bor included portfolio theory into the Employee Retirement Income Security Act which, to this
day, is still considered the gold standard against which trustees measure their duties and obliga-
tions. This action forced most state legislatures to revise the standards against which trustees
were judged.

The process finally culminated in 1994 with the publication of the Uniform Prudent Investor Act.
As commonly understood, the new act requires trustees (1) to be prudent and act as other care-
ful investment professionals would; (2) to diversify and thereby minimize risk; (3) to monitor their
investments and make necessary changes; and (4) to be loyal and act solely in the best inter-
ests of their beneficiaries. As such, the new rule allows institutional investors to consider the
overall portfolio, and, some argue, to pay closer attention to the social responsibility of their in-
vestments. 71

Some pension funds have seen the light, so to speak, and have moved to SRI on their own.
Here we provide three examples of SRI policies from leading pension funds.

The TIAA-CREF is one of the largest pension funds in the USA. It represents salaried staff in
universities, colleges and schools. TIAA-CREF offers a Social Choice investment option for its
members. This is a conservative mutual fund with negative criteria (prohibited sectors) and
positive criteria (desired characteristics).

The SRI policy of TIAA-CREF states,

“TIAA-CREF believes that building long-term shareholder value is consistent with directors’
giving careful consideration to issues of social responsibility and the common good. We rec-
ognize that efforts to promote good corporate citizenship may serve to enhance a com-
pany’s reputation and long-term economic performance, and we encourage boards of both
U.S. and international companies to adopt policies and practices that promote corporate citi-
zenship and establish open channels of communication with shareholders, employees, cus-
tomers, suppliers and the larger community. In particular, we believe that the following con-
cerns should be among the issues that companies address:

• The environmental impact of the corporation’s operations and products.

• Equal employment opportunities for all segments of the population.
• Employee training and development.

71
IFC 2003.
 33

• Evaluation of corporate actions to ensure that these actions do not negatively affect the
common good of the corporation’s communities and its constituencies.”

In the UK, the Universities Superannuation Scheme (USS) is a Lb. Billion pension fund for edu-
cators. USS announced its commitment to a socially responsible and sustainable investment
approach in 1999 and further elaborated this with a detailed strategy in 2000. At the time of the
initial announcement Professor Sir Graeme Davies, USS Ltd chairman, said: "Today no properly
run public company – or fund manager – should be unaware of the importance of public opinion
and ethical issues." USS states:

“We use our influence as a large £20 billion fund to encourage socially and environmen-
tally responsible corporate behaviour and good standards of corporate governance, and
wherever appropriate, we work with other powerful shareholders to achieve this objec-
tive. Our strategy is based on active engagement with the companies whose shares we
hold. This involves dialogue about acceptable standards of corporate governance, envi-
ronmental, ethical and social performance. This dialogue is professionally planned and
when needed, robust. Engagement also involves work to shape the context in which
company-specific discussions take place (for example, see below for our work on cli-
mate change). Apart from the moral issues involved, proper assessment of the reputa-
tional impact of the company’s performance on these wider fronts is increasingly mate-
rial to investment considerations. That is why we are working to fully integrate SRSI is-
sues within USS’s investment methodology.”

ABP Investments is one of the six national pension funds in Sweden. ABP’s policy on SRI
states

“The first responsibility of ABP Investments is to achieve the highest possible return on
investment. This enables ABP to safeguard the pensions of the fund’s 2.4 million partici-
pants. In addition to this, ABP, in the capacity of investor, is aware of its social responsi-
bility. For institutional investors as well, sustainable investment is becoming an increas-
ingly important item. Increasingly often the question is asked, by ABP’s fund participants
as well as by external interested parties, if ABP in its investment operations could not
take into account other considerations as well, besides the financial requirements. ABP
considers this to be a relevant question. All in all the question here is whether inside a
company in which ABP invests there are any features – ‘value’ or risks – which are not
(yet) reflected in the its annual report. This could for instance relate to environmental
risks, healthy labour relations and the quality of research. In its assessment of compa-
nies, ABP Investments takes into account such criteria.”72

There are many other examples of pension fund SRI policy available from organizations such as
JustPensions in London and SHARE in Vancouver, Canada

SRI and Pension Legislation

It is not surprising that CSR advocates focused on government pension funds where they can
generate policy pressure. In what may be one of the most important events in the history of
SRI, in 2000 the United Kingdom (UK) government responded to activists and modified the ex-

72
http://www.apb.org, March 30, 2004
 34

isting pension law. The text of the Amendment to the UK Pensions Act 1995, [1] effective July
2000, states that all pension funds trustees must include in their statement of investment princi-
ples:

”the extent (if at all) to which social, environmental or ethical considerations are taken
into account in the selection, retention and realization of investments; and
their policy (if any) in relation to the exercise of rights (including voting rights) attaching
to investments”

This is an ingenious strategy to promote SRI. The new rule does not require that any pension
fund change its practices. It just requires that they describe their practices – if they have any.
If they have no considerations of CSR, they must declare it. It is very difficult to resist a regula-
tion that simply tells you to say what you are doing, with no penalties for doing nothing.

But, we assume that most of the individuals who are trustees of pension funds have a relatively
strong public service ethic. We assume they do not want to sign public statements that they do
not consider social responsibility in their investments. It sounds bad. So they ask the invest-
ment professionals to respond to this new challenge, and then they realized that SRI is good
practice. In fact this is what happened in the UK. Within 2 years of the introduction of the UK
pension SRI legislation, over 60% of UK pension funds specifically included SRI in their state-
ments of investment principles.73

The legislation in the UK was observed with great interest in many other countries. Almost im-
mediately it was imitated. The following information about pension SRI legislation is taken from
the EuroSIF 2003 survey of SRI investment in Europe and from other sources:

Australia: On 11 March 2002, The Financial Services Reform Act 2001 came into
force. Pursuant to this Act, the providers of investment products, such as superannua-
tion products, are required to disclose in a Product Disclosure Statement the extent to
which labour standards or environmental, social or ethical considerations are taken into
account in the selection, retention or realisation of the investment. This disclosure re-
quirement will apply immediately to all new investment products. Older investment prod-
ucts will have two years to come into line with the new legislative requirements.

Sweden: As of 2002, the state funds have a single overall objective expressed in the
government bill as follows: "There shall be no economic policy or other economic politi-
cal objectives. Investment activities shall take environmental and ethical considerations
into account without lowering the overall objective of a high return". According to the
new laws the AP-funds “must take environmental and ethical considerations into account
without relinquishing the overall goal of a high return on capital”. According to corporate
governance policy of AP3s, one of the national pension funds, the Fund must ensure
that companies both have an “overall strategy for managing environmental and ethical
issues, and show transparency in its environmental and ethical reporting.”

Germany: From January 2002 on, certified private pension schemes and some occupa-
tional pension schemes “must inform the members in writing, whether and in what form
ethical, social, or ecological aspects are taken into consideration when investing the
paid-in contributions”.

73
EuroSIF 2003
 35

France: In May 2001 the New Economic Regulations law was passed that requires
companies to publish social and environmental information in their annual reports. This
reporting requirement has no direct impact on SRI; rather it was motivated by the SRI
demands for corporate CSR information. France is now the only country to require both
social and environmental reporting for all listed companies.

Connecticut: The State of Connecticut Retirement Plans & Trust Funds (“CRPTF”)
states, “Investments made or handled by the CRPTF should adhere to strict guidelines
on fiduciary investment prudence, corporate citizenship, including corporate governance
and equal employment opportunity, as set by the Treasurer and by state and federal law.
Prudence and consideration of corporate citizenship are complimentary goals, as recog-
nized by state law. Primary among considerations for the investment of the pension
plans and trusts, is the prudent investment of these assets for the long-term economic
benefit of the plan participants and beneficiaries. Prudence includes considerations of
performance, risk, and return. In addition to prudence, state law states that the Treasurer
may consider the social, economic, and environmental implications of its investments,
including the CRPTF investment in particular securities or types of securities” (Section 3-
13d (a) of the Connecticut General Statutes). [Italics added]

California: The California Public Employees Retirement System (CalPERS) is the larg-
est public pension fund in the U.S.A., with over $150 billion under management.
CalPERS has used positive SRI criteria in its investments in the USA for many years. In
February 2002 CalPERS became the first pension fund to apply SRI criteria in emerging
market investment, moving the best practice in pensions a step further ahead (see the
following section on SRI and Emerging Markets for more information)

In Spain, SRI was introduced into pensions voluntarily. Figure 10 contains a short description of
the policy in Spain.

Table 4: SRI and Pensions in Spain

REQUISITOS EN ESPAÑA DE LOS FONDOS DE INVERSIÓN

SOCIALMENTE RESPONSABLES

La Asociación de Instituciones de Inversión Colectiva y Fondos de Pensiones (INVERCO) agru-

pa, en calidad de miembros asociados, a la práctica totalidad de las Instituciones de Inversión
Colectiva (Fondos y Sociedades de Inversión) y Fondos de Pensiones españoles, así como a
las Sociedades Gestoras de Carteras.

El 15 de Noviembre de 1999 la Comisión de Etica de INVERCO emitió la Circular sobre utiliza-

ción por las instituciones de inversión colectiva de la denominación ético, ecológico o cualquier
otro que incida en aspectos de responsabilidad social, que obtuvo el visto bueno de la CNMV al
mes siguiente. De acuerdo con esta circular, los cuatro requisitos exigibles a las Instituciones
de Inversión Colectiva (IIC) para que puedan incluir en su denominación o destacar en su pu-
blicidad, además del nombre comercial, el término ético, ecológico o cualquier otro que incida
en aspectos de responsabilidad social son los siguientes:

Criterios en la política de inversiones. El Folleto Informativo de la IIC, que debe ser inscrito en
 36

la CNMV, fijará su ideario ético, estableciendo los criterios valorativos y/o negativos que debe-
rán cumplir los valores en cartera de la IIC para clasificar a las inversiones como éticas, ecoló-
gicas o socialmente responsables. Los criterios valorativos apoyan las inversiones en empre-
sas que contribuyen positivamente al desarrollo de las convicciones del inversor. Los criterios
negativos excluyen las inversiones en empresas cuyos ingresos o beneficios, en parte, o en su
totalidad, provengan de actividades que entren en contradicción con las convicciones del inver-
sor. Es importante señalar que tanto los criterios negativos como los valorativos admiten gra-
duaciones porcentuales.

Determinación de los valores aptos para la inversión. Serán seleccionados por una Comisión
de Etica, prevista y regulada en el folleto. La mayoría de los miembros de la Comisión deberán
ser personas independientes, que guarden una relación de experiencia o proximidad con la IIC.

Advertencia en los mensajes publicitarios. Con el fin de evitar una publicidad engañosa, en los
mensajes publicitarios deberá insertarse la siguiente mención: “Consulte en el folleto informati-
vo los criterios éticos del Fondo o Sociedad” y se hará una referencia al ideario ético de la IIC.

Información sobre el ideario ético y la Comisión de ética. El informe trimestral deberá incluir in-
formación relevante del trimestre sobre el ideario ético de la IIC y la composición y decisiones
de la Comisión de Etica.

Por otra parte, en la Circular se hacen dos importantes salvedades. En primer lugar, se advierte
que la utilización por cualquier IIC de la denominación “ética”, no significa que las demás se
gestionen con criterios no éticos o inviertan en empresas no éticas, sino que son determinados
criterios éticos, ecológicos o de responsabilidad social, propios de cada Institución los que de-
ben ser cumplidos en la selección de las inversiones. En segundo lugar, se diferencian las IIC
éticas, ecológicas o de responsabilidad social de las solidarias, ya que en estas últimas la So-
ciedad Gestora cede una parte de la comisión de gestión a determinadas entidades benéficas o
no gubernamentales. No obstante, puede haber una IIC de las características estudiadas que
simultáneamente sea solidaria, al combinar ambos aspectos, como se observa en el cuadro
adjunto. 74

Suddenly the level of best practice in pension fund investment has been raised. Western Euro-
pean countries are using SRI principles for pension fund regulation. The interesting strategy is
to require disclosure but not implementation. No pension fund is forced to change. But the
ethical pressure created by the need to talk about SRI in a competent manner, even if to reject it
(after extensive consideration of course!), pushes people to really think about it. Since the mar-
ket evidence is that SRI does not cost more, and can even help, we expect that trustees will di-
rect the investment professionals to give them something positive they can direct.

Best Practices for Pension Fund SRI

Pension fund trustees and directors can now expect a lot of help with SRI. In January 2004, two
SRI companies published Corporate Governance, Social Responsibility, and Obligations of

74
Gutierrez 2001.
 37

Ownership: A Background Paper for State Treasurers and Legislators.75 It is a guidance man-
ual that includes extensive background information on the history of social responsibility, rele-
vant policy and legal guidance, and SRI concepts. The paper argues that trustees and regula-
tors should consider five approaches to improving their CSR:

• Consider Improvements in Corporate Governance Guidelines

• Encourage Appropriate Social and Environmental Disclosure
• Consider Executive Compensation Issues
• Offer “Social Choice” Investments
• Further Reform State Corporation Laws to Promote Corporate Social Responsi-
bility

The paper concludes that “public officials, pension fund fiduciaries, legislators, and regulators
can take responsible steps to promote communications with investors and corporations that can
lead to greater openness and transparency in the financial sectors, while keeping within long-
established fiduciary guidelines. In addition, public officials help serve a larger public good by
encouraging corporate efforts to act in society’s interests and by promoting public debate on
issues of corporate governance and corporate social responsibility.”

This is a clear attempt to define best practice in pension fund investment policy. It is not alone.
The USS, whose policy for SRI was described above, in late 2003 published a practical guide:
How to be a Responsible Pension Fund: A manual on how to evaluate your fund managers for
pension funds who have a commitment to corporate governance and or responsible investing.
The model uses a criteria-based evaluation approach. This focuses on four areas, and within
each area, focuses on (generally) 10 key criteria.

“The four areas are:

A. Corporate governance & B. Corporate responsibility

• Organisation – which includes policy on and prioritisation of engagements.
• Effectiveness of engagement – which includes assessment of assertiveness,
of collaboration with other investors, setting engagement objectives and
evaluating outcomes and depth & persistence of engagement.
• Scope of engagement –divided into UK and non-UK securities.
• Resources available to support engagements –includes research resources
and the number and quality of specialist staff.
C. Integration
D. Leadership and culture” 76

To help other pension funds uses its manual, USS also published “How to be a Responsible
Pension Fund: The Template.”77 This is a very detailed survey of pension fund SRI practices
that can be used for self-evaluation.

75
DSI 2004. Corporate Governance, Social Responsibility, and Obligations of Ownership: A
Background Paper for State Treasurers and Legislators. Domini Social Investments, New York
City.
76
USS 2003a. How to be a Responsible Pension Fund: A manual on how to evaluate your fund
managers for pension funds who have a commitment to corporate governance and or responsi-
ble investing. Universities Superannuation Scheme Ltd. London.
 38

In the UK, two NGOs, Friends of the Earth UK and JustPensions, are actively monitoring and
participating in the development of pension SRI. Top 100 UK Pension Funds - How Ethical Are
They? 78 presents survey results and describes the funds considered to have the best SRI per-
formance. In Do UK Pension Funds Invest Responsibly? A Survey of Current Practice on So-
cially Responsible Investment 79, JustPensions presents the results of extensive discussions
about SRI with 14 pension funds managing about 20% by value (£170bn) of the assets held by
pension funds in the U.K. The report describes best practices in detail. In Will UK Pension
Funds Become More Responsible? 80 JustPensions surveys the state of SRI in UK pension
funds and finds it lamentable, with more talk than action. To help the pensions, the report in-
cludes a self-assessment guide to SRI for pension fund trustees.

JustPensions published A Guide for Trustees and Fund Managers in May 2001. 81 It provides
guidance to UK trustees and fund managers about how to comply with the new rules, using best
practices for SRI.

Pension funds are mission-based investors. Other mission-based investors include charities,
foundations, religious institutions and non-profit organizations. They are also under pressure
and are receiving guidance how to use SRI principles. For example, in 2001 the Canadian
Council for International Co-operation published Investing in Change: Mission-Based Investing
for Foundations, Endowments and NGOs. It “is meant to be an information source for those
within the charitable or non-profit sector who wish to explore the obvious - how to align the mis-
sion of their organizations with financial decision making.”

While NGOs and pensions are giving advice about how to be a socially responsible pension
fund, other organizations are focused just on the best practice of SRI. Of course they expect
that the largest investors, pension funds, will use the advice. For example, the Government of
Norway sponsored a review of SRI research companies in 2002. The objective was to identify
the best practices in SRI analysis. The report found a wide range of SRI analysis practices,
from simplistic to complex. The best practices recommended are:

• “Triple-bottom-line-approach: Focus should be on sustainable development, which

means that environmental, social and economic performance should be evaluated.

• Focus on best-in-class, and pioneers/innovators: A combination of investments in com-

panies which represent best-in-class in the ‘bluechip’ business sector, and investments
in companies representing pioneers/innovators offers both business and sustainability
opportunities.

77
USS 2003b. How to be a Responsible Pension Fund: The Template. Universities Superan-
nuation Scheme Ltd. London.
78
FOE 2003. Top 100 UK Pension Funds - How Ethical Are They? Friends of the Earth UK,
London.
79
JustPensions 2003a. Do UK Pension Funds Invest Responsibly? A Survey of Current Prac-
tice on Socially Responsible Investment. JustPensions, London
80
JustPensions 2003b. Will UK Pension Funds Become More Responsible? JustPensions,
London.
81
Just Pensions 2001. A Guide for Trustees and Fund Managers. JustPensions, London
 39

• Evaluating sustainability opportunities and sustainability risks: A screening process

aimed at identifying best-in-class companies regarding environmental and social per-
formance should, to a large extent, focus on sustainability opportunities.

• ‘Intelligent’ screening model: (combination of qualitative and quantitative analysis): En-

vironmental performance can to some extent be quantified, but should not be limited to
compliance testing. The quantitative evaluation also include risks of being too standard-
ized, not suiting all business sectors” . 82

Some observations about the state of SRI in pension funds are clear:

Leading pension funds around the world – the biggest and (presumably) best informed –
now regard SRI as a vital strategy for long term performance

Governments have also recognized this, and SRI is going to become a major issue for pen-
sion fund investment policy around the world.

Advocates and even pension funds themselves are publishing guides for the best practices
for SRI in pension fund management and legislation, and this will increase as more funds
become involved.

Any discussion of SRI should include pension funds. Any discussion of pension funds
should include SRI. SRI offers new opportunities

The best practice in pension fund SRI is to use positive and/or best-in-class criteria for
evaluating the management of CSR and sustainability in corporations under consideration.

Emerging Markets

Stock Investment in Emerging Markets

As emerging markets have improved their financial systems there has been a rapid increase in
international investment in them. In fact between 2002 and March 2004 emerging markets have
been one of the best performing sectors of the stock market, as can be seen from the perform-
ance data of emerging market indexes included in any issue of the Wall Street Journal.

Figure 8: The composition of capital flows to Emerging Markets

82
MISTRA 2003. Screening of Screening Firms for Socially Responsible Investment: An as-
sessment of the quality of existing products/services. MISTRA, The Foundation for Strategic
Environmental Research, Oslo, Norway.
 40

Figure taken from IMF Global Financial Stability Report 2003

Figure 10 shows that international investors (dedicated EM funds) are becoming a major force
in emerging markets.

The Institute for International Finance, Inc. publishes regular reports about investment in emerg-
ing markets, including extensive details about the quantities of investment in regions and sec-
tors. In September 2003 the IIF reported:

“Net private capital flows to emerging market economies are projected to increase to
$162 billion this year [2003] from a trough of $121 billion in 2002, with a further rise to
$186 billion forecasted for next year. The turnaround in private capital inflows this year is
supported by a rebound in portfolio investment and net banking flows as well as an in-
crease in bond flows. Issuers have benefited from a significant decline in emerging mar-
kets bond spreads since late last year, while investors’ have searched for better yields in
the absence of attractive alternatives in mature markets. Direct investment in the mean-
time seems set to decline further this year, but is likely to rebound in 2004 to a more up-
beat outlook by business executives and investors, providing the impetus to larger over-
all private capital inflows. Downside risks to this outlook include weaker global growth
than now envisaged, the failure of officials to maintain policy vigilance in several key
emerging market countries and the possibility of another jump in U.S. interest rates.”83

Extensive information about financial markets in developing countries is included in the World
Bank Report on its Fifth Annual Financial Markets and Development Conference in 2003. Inter-
national equity investment is a major component of markets and attracting more foreign invest-
ment is an important objective that must be supported by various policy reforms. 84

83
IIF 2003. Capital Flows to Emerging Market Economies. Institute for International Finance
Inc. Washington DC.
84
WB 2002. Proceedings, Fifth Annual Financial Markets and Development Conference. World
Bank, Washington DC.
 41

International mutual funds are one of the main channels for capital flows to emerging econo-
mies. Kaminsky et al 85 provide an overview of mutual fund countries within each region. activ-
ity in emerging markets. They describe international mutual funds' size, asset allocation, and
country allocation, and on fund behavior during crises. They find that when investing abroad,
U.S. mutual funds invest more in equity than in bonds. During crises they exhibit herd behavior
and move “with the flow” in and out of markets.

While foreign direct investment (FDI) constitutes the largest share of capital flow to Asia and
Latin America, portfolio investment (bonds and equity) has also increased substantially, ac-
counting for about 40 percent of total capital flows in the 1990s. Kaminsky et al note that re-
ported equity flows are underestimated: any equity flow meant to acquire more than 10 percent
of a company's outstanding shares is recorded as FDI, which accounts for around 50 percent of
total capital flows.

International institutional investors are the source of most liquid capital flow. More than half of
pension funds invest in emerging markets through existing mutual funds. The influence of in-
ternational institutional investors can be significant. Mutual funds dedicated to emerging mar-
kets alone hold on average between 4 and 15 percent of the Asian, Latin American, and transi-
tion economies' market capitalization.

Various sources offer guidance to investors considering emerging markets. For example, Um-
land describes the relative characteristics of emerging markets to developed markets on topics
such as bid-ask spread for trading stocks, country and market risks, and trading costs. Umland
concludes, “There are many costs and difficulties associated with investing in emerging mar-
kets countries. Investors may benefit from careful top-down country evaluation, disciplined
country allocation, and broad diversification, particularly into small cap and value companies.” 86

Advocates of international development are encouraging more institutional investment in emerg-

ing markets. As noted above, Gottschalk makes a business and moral case for pension fund
investment in emerging markets. 87 Kimmis et al studied emerging markets and pension fund
portfolios and argue that their paper shows the continued validity of the case for UK Pension
Funds investing part of their portfolio in emerging markets in order to obtain an optimal
risk/reward mix that will maximise return for any given level of risk. 88

Blommstein gives a good overview of Institutional Investors, Pension Reform and Emerging Se-
curities Markets. 89 He concludes that there is great potential for increasing investment by pen-
sion funds in emerging markets but a number of policy reforms are needed to realize the full
potential.

85
WB 2001. Mutual Fund Investment in Emerging Markets: An Overview. G. Kaminsky, R.
Lyons, S. Schmukler. World Bank, Washington DC.
86
Umland 2003. Emerging Markets: Managing Risk. K. Umland, Dimensional Fund Advisors
Inc.
87
Gottschalk 2003b
88
Kimmis 2002. UK Pension Fund Investment and Developing Country Assets. J. Kimmis, R.
Gottschalk, E. Armendariz, S. Griffith-Jones, University of Sussex, Brighton.
89
Blommstein 1997. Institutional Investors, Pension Reform and Emerging Securities Markets.
H. Blommstein, Inter-American Development Bank, Washington DC
 42

Gottschalk describes the most recent traits of international investors in emerging markets, as
well as trends they are following, in terms of investment strategies, allocation decisions and risk-
management procedures. The paper ends with policy suggestions on how to encourage interna-
tional lenders and investors to channel a larger proportion of their funds to developing coun-
tries.90 In a related paper Gottschalk argues, “Why It Can Be Economically and Morally Re-
warding to Invest in Developing Countries.” He describes the financial returns and why there is
a moral obligation for investors in developed countries to support development in emerging
markets through active investment.91

This overview shows that international investment in emerging market equities through mutual
funds is a major source of capital for emerging markets. We note that mutual funds are the pre-
ferred choice of investment vehicle for most socially responsible investors, and that there is an
increasing intersection between emerging market investment and SRI.

90
Gottschalk 2003b. International Lenders’ and Investors’ Behaviour: What the Markets Tell Us
We Didn’t Know. R. Gottschalk, University of Sussex, Brighton.
91
Gottschalk 2003a. Why It Can Be Economically and Morally Rewarding to Invest in Develop-
ing Countries. R. Gottschalk, University of Sussex, Brighton.
 43

Foreign Direct Investment in Emerging Markets

Foreign Direct Investment (FDI) represents about half of the international capital flows to emerg-
ing markets. 92 , 93 Any discussion of SRI in emerging markets must address FDI.

FDI is defined by the International Monetary Fund as equity ownership of more than 10% of a
foreign company. Foreign direct investors can be passive or active partners. In some develop-
ing countries the national rules for foreign ownership prohibit foreign investors from owning a
controlling interest in national companies. In others companies can be wholly owned by foreign
investors or firms. FDI includes investment in subsidiary companies, such as manufacturing
operations that are wholly controlled (if not owned) by the parent firm in another country.

Schatz 94 provides an excellent overview of FDI with a focus on Andean countries of South
America. The report notes the importance of FDI in the region and gives recommendations for
increasing FDI. Schatz observes that substantial portion of FDI from 1994-1998 was targeted to
large infrastructure projects associated with privatization of state industries and that this is ex-
pected to continue (as it apparently has). Export-oriented investment is identified as the key
type of investment on which Andean countries should focus. Possible policy interventions in-
clude improving access to developed country markets, lowering trade costs, improving export
processing zones, and investigating the further use of efficient investment incentives.

FDI has long been encouraged to be more socially responsible. For example, the OECD Guide-
lines for Multinational Corporations puts extensive emphasis.on CSR. 95 Many NGOs lobby for
improved CSR in FDI, and major infrastructure projects financed by SRI are scrutinized by activ-
ists for their responsibility. For example, in Peru the CAMISEA project to bring natural gas from
the Amazon basin to the coast of Peru and the capital of Peru is the largest FDI project in the
country. Many local and a significant number of international NGOs have vigorously protested
the project in general, and in some cases lobbied specifically for CSR in the project. In re-
sponse, the Inter-American Development Bank (IADB) attached significant CSR conditions to its
financing of the project.

The importance of CSR in FDI has been recognized by the Foreign Investment Advisory Service
(FIAS) of the World Bank. The FIAS helps developing countries become more attractive desti-
nations for FDI. FIAS has a new initiative focused on CSR and provides matching funds for
technical assistance to promote CSR within industry sector in developing countries.96 A major
focus of this assistance is improving the regulation and promotion of compliance with existing
government regulations, including improving cooperation between industry associations and
government regulatory agencies. Another major focus is improving competition capacity in ex-

92
WB 2001
93
WB 2003
94
Shatz 2001. Expanding Foreign Direct Investment in the Andean Countries. H.J Shatz. Cen-
ter for International Development, Harvard University, Cambridge, Massachusetts
95
OECD 2000. The OECD Guidelines for Multinational Enterprises, Revision 2000. Organiza-
tion for Economic Cooperation and Development, Paris.
96
Sader 2004. Personal communication from Frank Sader, Latin America coordinator, Foreign
Investment Advisory Service, World Bank, Washington DC. January 2004.
 44

port markets. A large amount of FDI is focused on exports, because this generates dollar in-
come that can be recovered with relatively low exchange risk by foreign shareholders.

In October 2003 the CSR Group of the World Bank conducted a survey of 107 Multinational En-
terprises (MNEs) about the importance of CSR to their FDI.97 MNEs reported that CSR can be
a significant factor in determining where and with whom they do business. Over 80 percent of
respondents reported that they look at the CSR performance of potential partners and locations
before they close the deal on a new venture. More than half of the respondents reported that
the review takes place while they are still looking at multiple partners and countries. A majority
of companies reported that CSR issues are at least as influential as traditional considerations
(for example, cost, quality, delivery) in new venture assessment, and that this influence has
grown in the last five years

There is certainly a strong belief in some groups that CSR improves the financial performance
of FDI. However the influence of CSR on FDI is questioned. Parris examined the success of
Corporate Codes of Conduct in FDI. He concludes that much of the time compliance with vol-
untary codes is weak, and that FDI which relies on codes of conduct to support CSR are not a
substitute for effective government regulation. 98

A similar conclusion was reached by the World Bank in a recent review titled, Strengthening Im-
plementation of Corporate Social Responsibility in Global Supply Chains. 99 Supply chains are
not FDI unless the supplier is a subsidiary of the buyer (which is often the case). But from the
point of view of international buyers making important decisions for long term contracts, select-
ing a supplier in an emerging market is certainly a significant investment.

The World Bank broadly confirms the underlying assumption of the Bank Group that the present
system of implementation of codes of conduct is insufficient and even inefficient in achiev-
ing further real and sustained improvements in social and environmental standards in global
supply chains.

We observe that liquid equity (mutual fund) investment and FDI are both critical to emerging
markets, and FDI is increasingly concerned about CSR. But FDI has been using codes of con-
duct for CSR as a major criteria, and the evidence shows this is not being very effective.

Therefore it is important to note that codes of conduct are NOT very important to most SRI mar-
ket funds. They do consider codes of conduct, but they focus more on performance in specific
areas for CSR such as labor relations, environmental protection and pollution prevention, etc.
This has important implications for FDI. Investors are learning that codes of conduct are not a
good assurance of CSR and they will look for alternatives. At the same time, FDI companies
such as MNEs are themselves under evaluation by SRI funds who are using quite detailed crite-
ria for CSR in some cases. Thus there appears to be a good opportunity for helping FDI by us-
ing CSR criteria from the SRI market to evaluate potential investments in emerging markets.

97
WB 2003. Race to the Top: Attracting and Enabling Global Sustainable Business. World
Bank, Washington DC.
98
Parris 2001. Foreign Direct Investment and Corporate Codes of Conduct in National Devel-
opment Strategies: Costs, Benefits and Policy Options. B. Parris, in OECD Global Forum on
International Investment, Mexico City, November 2001. OECD, Paris.
99
WB 2003. Strengthening Implementation of Corporate Social Responsibility in Global Supply
Chains. World Bank, Washington DC.
 45

Corporate Social Responsibility in Emerging Markets

SRI is still a small factor in emerging market investment but it is going to become a major factor.
The Foreign Investment Advisory Service of the World Bank declares,

“For developing countries, maintaining and demonstrating sound employment and envi-
ronmental practices has become a critical element in their ability to remain internationally
competitive, to attract investment and to maintain or expand market shares in export
markets.”100

The FIAS has established a technical assistance grant fund to help emerging markets and gov-
ernments develop their CSR capacity.

The leading advocate of SRI and CSR in emerging markets is the International Finance Corpo-
ration of the World Bank Group. Sustainability is now a driving force and official policy for the
IFC. It has been conducting CSR training for financial institutions for over 10 years, with a pri-
mary focus on environmental risk assessment. Since 1997, over 375 managers from 275 finan-
cial institutions and 45 nations have participated in the IFC’s Competitive Environmental Advan-
tage workshop series.

In 2002 the IFC conducted extensive interviews with managers of finance institutions who par-
ticipated in these workshops. They also conducted a detailed questionnaire survey of a repre-
sentative sample of 60 institutions from different regions. The report, Beyond Risk, concludes,

“In developed markets, the concept that environmental risk can critically affect the viabil-
ity of investments is well understood. But in emerging markets, the appearance of a new
set of global stakeholders presents both risks and opportunities for financiers.

Four major conclusions emerge:

• New classes of stakeholder are transmitting both risk and reward to companies
and financial institutions as a result of their environmental and social perform-
ance
• A number of financial institutions are responding rapidly to these market drivers,
implementing sustainability initiatives strategically across a range of internal and
external operations.
• Barriers to implementation, however, do remain. One key issue identified is the
absence of up to date information in the form of industry risk and opportunity
• While supply-side initiatives such as the IFC workshops play a critical role in
helping to establish best practice, significant additional barriers include the per-
ceived low market incentives for sustainability and as a consequence, financial
sector practices that do not integrate sustainability systematically into opera-
tions.

100
Sader 2004. Project Description: Foreign Direct Investment and Responsible Globalization.
F. Sader, Working Paper, Foreign Investment Advisory Service, World Bank, Washington DC.
 46

The development community should explore opportunities to complement capacity

building initiatives with strategic demand-side initiatives that enhance market incen-
tives for sustainable performance. A number of market players have the potential to
provide critical incentives for sustainable financial sector performance. Perform-
ance drivers identified include insurers, analysts, raters, co-financiers, central banks,
SRI investors, and long-term institutional investors.

An innovative range of capacity building programs is necessary to activate these po-

tential market reward mechanisms—from new methodologies for raters and analysts
to assess and reward financial institution performance to sustainability criteria
for central bank oversight as a component of prudential bank management.”101

The potential for CSR to add shareholder value in emerging markets has been investigated by
the IFC in Developing Value: The Business Case for Sustainability in Emerging Markets. This
survey of more than 200 companies around the world in which the IFC invests shows that:

“The most significant opportunities available [to add shareholder value] through actively
pursuing more sustainable approaches to business are to:

• save costs by making reductions to environmental impacts and treat-

ing employees well;
• increase revenues by improving the environment and benefiting the local econ-
omy;
• reduce risk through engagement with stakeholders;
• build reputation by increasing environmental efficiency;
• develop human capital through better human resource management;
• improve access to capital through better governance.” 102

These opportunities are documented in many examples throughout the report, as well as in four
in-depth case studies from Brazil, China, the Czech Republic and South Africa.

Other international organizations also promote CSR to develop shareholder value. For exam-
ple, the Prince of Wales International Business Leaders Forum in London has published a guide
for CSR, Building CSR in developing countries: sources of practical support along the way. 103
The Global Environmental Management Initiative has documented the importance of CSR in
multinational investment in developing countries. The World Business Council for Sustainable
Development has chapters in many developing countries and offers advice on CSR for devel-
opment in various sectors and topics. The United Nations Environment Programme and the UN
Industrial Development Organization manage a global program on Cleaner Production in devel-
oping countries to help companies improve their environmental performance.

Major institutions recognize the importance of CSR for emerging market development. This
trend is intersecting with the continued growth of liquid equity investment and Foreign Direct In-
vestment in emerging markets.

101
IFC 2003. Beyond Risk. International Finance Corporation, Washington DC.
102
IFC 2002. Developing Value: The Business Case for Sustainability in Emerging Markets.
International Finance Corporation, Washington DC.
103
IBLF 2002. Building CSR in developing countries: sources of practical support along the
way. Prince of Wales International Business Leaders Forum, London.
 47

SRI Funds in Emerging Markets

In October 2003 the International Finance Corporation published Towards Sustainable and Re-
sponsible Investment in Emerging Markets: A Review and Inventory of the Social Investment
Industry’s Activities and Potential in Emerging Markets.104 This is a comprehensive review and
is recommended as the definitive information resource on this topic. The review found that SRI
has significant potential in emerging markets, although the amount of SRI in emerging markets
is still quite small.

“We do not see rapid, “organic” growth of SRI in emerging markets over the short term.
In the medium and long term, however, growth prospects appear solid, particu-
larly among institutional investors (both in developed countries and emerging markets),
fueled by promising SRI fund performance, improving regulatory standards, growing
demand for SRI and increasing acceptance by institutional investors of SRI as a finan-
cially worthy and even desirable approach.

To spur this growth, the creation of a strong, emerging-market SRI infrastructure should
be a top priority for the SRI sector and for other interested parties. With this goal in mind,
a set of recommendations are offered in Part Five on how IFC's Sustainable Financial
Markets Facility could help catalyze emergingmarket SRI.

The set of recommended steps falls into three categories:

• Steps to support a stronger knowledge and networking infrastructure: the people,

organizations and companies that will drive emerging-market SRI in the future.

• Steps to support the creation of corporate social and environmental performance

data services focused on emerging markets.

• Steps to motivate more institutional and retail SRI, including engaging institu-
tional investors on the subject and supporting the launch of high-
profile emerging-markets funds.”

The IFC has already taken significant steps in this direction. It has established technical assis-
tance grant facilities that support SRI in emerging markets. The Sustainable Financial Markets
Facility (SFMF) supports CSR and SRI, including an active program to train bankers in social
and environmental risk analysis. The SFMF plans to promote SRI through awareness programs
at this time because there is not enough capacity in emerging markets to support significant SRI
initiatives.105 The other relevant program is the Corporate Citizenship Facility. It is focused on
building CSR capacity in all sectors, which increases the potential for SRI. The SFMF is cur-
rently (May 2004) in discussion with ASBANC, the association of bankers in Peru, about devel-

104
IFC 2003. Towards Sustainable and Responsible Investment in Emerging Markets: A Re-
view and Inventory of the Social Investment Industry’s Activities and Potential in Emerging Mar-
kets. International Finance Corporation, Washington DC. http://www.ifc.org
105
Dan Siddy, manager, Sustainable Financial Markets Facility, International Finance Corpora-
tion. Personal communication, March 2004.
 48

oping a national training program for CSR and SRI in banking. (This was initiated by the author
in the course of this investigation.)

The IFC report identified 55 SRI mutual funds that invest in emerging markets either in part or
completely. The funds are all relatively new, less than 5 years old. Details are included in Fig-
ure Based on the information that can be obtained from their public reports and investment pro-
spectus, they use a relatively simple set of CSR criteria for evaluation (they may use more ex-
tensive or sophisticated criteria but do not choose to explain it). The amount of money invested
by the fund is about $2.7 billion, which is a very small proportion of the more than $2 trillion in
SRI around the world. However it should be remembered that this is a very new area for in-
vestment, since many emerging markets themselves only became reasonable prospects for
stock market investment in the 1990s, and there is fast growth. So we should expect rapid
growth in the number and size of SRI funds in emerging markets.

The IFC report supports this expectation. As part of the research, IFC consultants interviewed
SRI professionals to learn about their interest in emerging markets.

“The evidence suggests that there is significant, if latent, demand for emerging market invest-
ment among both individual and institutional social investors…. Interviews with SRI fund pro-
fessionals conducted for this report indicated total demand from among their clientele stands at
between $500 million and $700 million for emerging-market investments. Among these inter-
viewees, an in-house fund was most often noted as the preferred vehicle, followed by a third-
party institutional fund. Retail mutual funds were mentioned next… Latin America was the
most often noted geographic area of interest (contrary to the current distribution of SRI, which
favors Asia).”

The IFC report contains extensive additional information which does not need to be repeated
here (the report is available for free download from the IFC website). Most importantly, it shows
that SRI is going to be a significant factor in the future of emerging equities markets, if trends in
developed markets are followed. In fact, SRI could and possibly will become even more impor-
tant in emerging markets than in developed markets, because there is more concern about CSR
in emerging markets. As emerging market investors observe that SRI produces competitive
performance in the developed markets, it seems very likely that they will start using CSR criteria
in their investments.

Figure 9: SRI Funds in Emerging Markets

 49

A significant indicator of investor activism for CSR in emerging markets happened in 2002. The
California Public Employees Pension System (CalPERS) is the largest investment fund in the
USA and the third-largest in the world, with about $150 billion in assets. In February of 2002
CalPERS demonstrated the application of SRI principles for pension fund investment in emerg-
ing markets. CalPERS decided to adopt a new approach to its investments in emerging mar-
kets. The approach was radical in that it based its decisions regarding which countries were
“permissible” not only on broad financial factors (such as market liquidity, volatility, openness,
settlement proficiency and investor protections), but also on a series of “non-financial” factors
ranging from political stability to labor standards. It was the first time a pension fund in the U.S.
(and possibly in the world) took so-called “non-financial” factors into account in its emerging
markets investments. And, because of CalPERS’ size, the decision mattered: the fund invests
approximately $1.4 billion in emerging markets.
 50

On Febuary 20th, 2002, based on the new guidelines, CalPERS published its list of countries
where investment risk was acceptable. CalPERS decided to end its investment of public equity
in Indonesia, Malaysia, the Philippines, and Thailand (Peru is an approved country for CalPERS
investment). CalPERS determined that these countries could not provide adequate data or
showed low performance for non-market factors, including labor relations.

"We're not trying to send a message to these countries," said CalPERS spokesperson
Brad Pacheco. "We do believe there are things that need to be improved before we will
invest there. But this is not intended . . . to try to create some ripple effect or effect some
kind of change. This is really intended to make sure that we're meeting our [fiduciary] ob-
ligations to our pensioners and that we're investing in a prudent manner."106

The decision by CalPERS was front-page news across Asia and caused a drop of about 2 to
3% in regional stock markets immediately. The markets recovered soon, but there was a clear
message to emerging markets that large institutional investors such as pension funds are now
looking beyond profits to CSR criteria.

Microfinance in Emerging Markets

Microfinance is one of the few kinds of SRI that was specifically designed for emerging markets.
Microfinance can be considered socially responsible in its very nature – it is intended to help the
poorest people improve their lives. Microfinance is now a major activity in development around
the world. For example, in Peru alone there are about 80 microfinance operations.

An important trend in microfinance is privatization and integration into mainstream capital mar-
kets. Almost all microfinance organizations begin as non-profit development activities. But in
some cases microfinance is turning out to be quite profitable. Investors have noticed this and
are starting to invest in microfinance funds. However they only invest when the funds are privat-
ized and their management is improved to international standards. This is creating significant
pressure in the microfinance sector to become more like real banks, in fact in a number of de-
veloping countries the banking regulators are now developing rules for microfinance institutions
so they can be integrated into the national banking system.

Conger provides a good overview article of the privatization and market capitalization process
for microfinance in Latin America. 107 Microrate is a private firm that rates the financial and
management performance of microfinance institutions. The October 2002 issue of the Microrate
newsletter provides a comprehensive analysis and statistics about the privatization of microfi-
nance. 108 Time Magazine reported in 2003 on the new interest on Wall Street in commercial
financing of microfinance and on the new venture by Deutsche Bank in this area. 109

106
Baue 2002. CalPERS Divests from Four Emerging Countries. W. Baue, SRI World Group,
http://www.ishareowner.com, March 01, 2002
107
Conger 2003. To Market, To Market. Microenterprise Americas, Inter-American Develop-
ment Bank, Washington DC.
108
Microrate 2002. The Finance of Microfinance. Microrate
109
Time 2003. Why Micro Matters: Wall Street is figuring out how to profitably package tiny
loans to Third World entrepreneurs. Time Magazine, 24 November 2003
 51

There appears to be a general perception that microfinance is socially responsible just because
it is microfinance. However, some institutions have already recognized that the use of social
and environmental criteria for evaluating microfinance loans is important. In 1997 the Inter-
American Development Bank published guidelines for evaluating and mitigating the environ-
mental impact of microfinance loans. We have found no guidelines for social risk management
in microfinance, but perhaps that is because the social aspects are already considered exten-
sively within the evaluation by microfinance institutions.

By its nature, microfinance fits into the vision of SRI. By its profitability and continuing conver-
sion to a development activity to a private financial sector industry, it is becoming a potential
investment area for SRI funds. For example, bond issues from microfinance institutions have
caught the eye of the Calvert Foundation, a non-profit organization that is part of the Calvert
Group, one of the largest SRI companies in the USA. The Foundation established a facility to
channel investments to help end poverty; to this end, the foundation makes loans to Latin
American microlenders. “Calvert is likely to be a buyer of bonds of microfinance institutions in
Latin America,” says Shari Berenbach, Calvert Foundation executive director. She is currently
investigating legal issues that may restrict U.S. investors from buying foreign securities and is
devising ways to cover the foreign exchange risk involved in purchasing foreign bonds.110

Recently a consulting firm surveyed SRI fund managers in the USA to learn about the potential
demand in SRI for microfinance investments.111 Their results suggests significant latent demand
among both individual and institutional social investors for high impact social investments in mi-
crofinance institutions. In fact, they estimate potential demand for SRI in emerging markets and
microfinance to be about $3 billion, which is over 5 times the existing capitaliztion of microfi-
nance institutions.

Microfinance is a type of SRI that is unique to emerging markets. It is evolving from its origins in
development funding towards a commercial investment product that is available to SRI funds.
We should expect that SRI funds will start developing responsibility criteria for their microfinance
investments, beyond those that are already used by microfinance lenders.

Chapter Conclusion

This chapter has demonstrated that SRI is becoming a major trend in investment around the
world. It is being driven by some of the most powerful investment institutions, such as pension
funds, and by new focus on corporate governance. Its performance is competitive with the mar-
ket benchmarks. It is increasingly relevant to emerging markets where CSR is particularly im-
portant because of relatively ineffective government safeguards for environmental and social
protection from business impacts.

SRI is important but it is complex. With over 700 different SRI mutual funds alone, using hun-
dreds of different criteria for CSR to make their investment decisions, there is a very important
question: What are the core criteria for CSR that are important to investors? The answer is
critical to any company that wants to improve its CSR in a way that adds shareholder value.

110
Conger 2003.
111
ESGC 2003. The Potential For Social Investment in Microfinance and Small Enterprise in
Developing Countries. Enterprising Solutions Global Consulting, New York City.
 52

The next chapter provides the results of our investigation into the core criteria for CSR used in
the CSR market.
 53

Chapter 3. CSR Criteria for Socially Responsible Investment

Overview of Positive CSR Criteria in SRI

Positive screening, or the use of positive criteria for CSR evaluation, is not the biggest part of
the SRI market (which is negative screening or avoidance of undesirable market sectors). But it
the most important part because it is active investment based on expected profitability. It pro-
duces new CSR criteria. The analysts for positive SRI funds believe that specific kinds of CSR
will improve investment performance. They are betting their money that there is a positive cor-
relation between responsibility and profitability. They also seek out “best-in-class” performance
within industry sectors. For example the Dow Jones Sustainability Index includes 60 sectors.
Each sector includes the corporations in that sector from the Dow Jones Global Index that are
considered to be the top 10% in CSR performance. This approach is the leading edge in SRI.
A recent study to evaluate SRI investment strategy, sponsored by the government of Norway,
states that positive screening and best-in-class selection is the best practice for SRI re-
search and investment.112

Complicating this recommendation is the fact that many diversified companies have operations
that pass some screens and fail others. For example, the General Electric corporation produces
energy-efficient light bulbs (good for the environment and global warming), and also nuclear
weapons and jet airplane engines (bad for the environment and global warming). Hundreds of
similar examples exist. Thus SRI funds face significant challenges to determine if a company is
“socially responsible”. In many cases the funds have resorted to selecting companies with “best
practices” within sectors, so they do not have to reject a company based on its activities, but
rather can select it based on its performance of these activities relative to its competitors in the
sector.

A good example of the current practice in SRI is the Calvert World Values International Equity
Fund. It uses four positive criteria and seven negative criteria. This fund was established in
1992 and now has over $250 million in assets under management. It is a good example of
other leading SRI funds.

“[The Calvert World Values Equity Fund] is socially screened according to criteria listed
below. Calvert believes this screening process helps to identify companies with strong
management and solid business practices, thereby providing the best opportunity for
long-term success. We seek to invest in companies that:

• Strive to reduce their impact on the environment, through positive programs

• Have a record of positive labor relations, including promoting women and ethnic
minorities, respecting the right to form unions, complying with applicable labor
laws and providing good health and safety standards
• Produce or market safe, healthy and useful products or services

112
MISTRA 2003. Screening of Screening Companies - Socially Responsible Investment: An
assessment of the quality of existing products/services. MISTRA, The Foundation for Strategic
Environmental Research, Oslo.
 54

• Are responsible corporate citizens in the communities where they operate

We avoid investing in companies that:

• Are major polluters or have consistent environmental compliance problems
• Are primarily engaged in nuclear power
• Have a record of poor labor relations
• Demonstrate a pattern of engaging in forced, compulsory or child labor
• Are significantly engaged in the manufacture of weapons, tobacco, alcohol or are
involved in gambling operations
• Participate in the systematic denial of basic human rights
• Fail to meet international standards in their overseas operations”113

Several survey have been conducted to determine what investors think is Socially Responsible.
Table 3 lists the criteria for CSR that are most frequently used by European SRI funds.

Table 5: Frequency Analysis of Positive CSR Criteria in European SRI Funds, 2002 114

Positive criteria % of funds

Environmental policy, codes, management systems, environmental
64%
assessment
Products beneficial for the environment and quality of life 58%
Environmental processes and performances (inputs and outputs) 55%
Customers & Suppliers, product safety, advertisement, competition is-
52%
sues
Employees, working conditions, family friendly policies, industrial rela-
48%
tions and unions, training
Environmental and social reporting, accountability and transparency 48%
Provision of Environmental services and technologies 48%
Social policy, codes and management systems including certified
45%
schemes
Good relationships with communities and citizenship 39%
Environmental technical innovations (recycling, preventive measures,
36%
eco-design …)
Corporate governance 24%
Good records and practices on diversity and minorities 24%
Preventive measures to avoid human rights violations 24%

It is important to note how specific are the environmental issues included in this response. They
cross almost every major function of a company, from policy to product design to production to
promotion. This is a good example how SRI analysts are linking CSR to specific company func-
tions.

The Dow Jones Sustainability Index (DJSI) is a good example of the use of CSR criteria in the
SRI market. The DJSI is organized into 60 business sectors. Then the companies listed on the

113
Calvert 2003. Prospectus, Calvert World Values Equity Fund. Calvert Group, Bethesda MD
114
Avanzi/SiRi Group in cooperation with CSR Europe, 2002
 55

Dow Jones Global Index (some 2000 corporations) are surveyed about their CSR performance.
Table 9 shows the criteria that are used by DJSI.115

Table 6: CSR Criteria Used by the Dow Jones Sustainability Index

Economic Criteria Environmental Criteria

Corporate Governance Environmental Management
Customer Relationship Management Environmental Performance
Financial Robustness Industry-Specific Criteria
Investor Relations
Risk & Crisis Management Social Criteria
Scorecards / Measurement Systems Employee Satisfaction
Strategic Planning External Stakeholders
Supply Chain Management Human Capital Indicators
Industry-Specific Criteria Management Attention to Human Re-
sources
Organizational Learning
Public Reporting
Remuneration, Benefits,Flexible Work-
Schemes
Workforce Capabilities
Industry-Specific Criteria

The Dow Jones Company hires a consulting firm, Sustainability Asset Management (SAM) in
Zurich, to conduct the CSR survey and analysis and to manage the index. In each of the 60
sectors SAM ranks the sector corporations by the criteria above and picks the top 10% of them,
the best CSR performers in their group, to include in the index. This is a pure “best in class”
strategy. The DJSI does not exclude any sectors based on ethical concerns about products or
services. The criteria used by the DJSI are relatively typical of the other indexes – in fact they
are more detailed than most.

It seems that every organization promoting CSR has its own set of criteria. The UK-based Ethi-
cal Investment Research Service (EIRiS), for example, estimates that when the organisation
was set up in 1983, five principal criteria were considered – today 330 different criteria in 30 ar-
eas are used.116 The use of specific criteria for SRI has advanced to the point where there are
databases of criteria available to investors and others. This is a response to the desires of
many investors to specify exactly what criteria they want for SRI.

Figure 5 shows an example of a database of criteria produced by the Social Investment Forum
and updated on its website (www.socialinvest.org).

Figure 10: Example Database of SRI Criteria

115
Dow Jones Sustainability World Indexes Guide, Version 5.0, September 2003.
116
MISTRA 2003
 56

There are 92 funds represented in this database. We summarized the distribution of investment
criteria as shown in Figure 7. The criteria in orange are considered negative criteria where the
investors avoid the sector or practice; the criteria in green are positive criteria where the inves-
tors look for good performance. When positive criteria such as environmental show that some
firms have a policy of “no investment,” that means the firms do not invest in companies with a
poor record on these activities.

Figure 11: Use of CSR Criteria in 92 SRI Funds

 57

Corporate Social Responsibility Criteria Used by 92 SRI Funds

Animal Testing

Environmental

Human Rights

Employment /

Proxy Voting
Community
/Weapons
Gambling

Relations

Investing
Alchohol

Tobacco

Defense

Equality
Labor
Use of Criteria
No Investment 67 82 65 59 7 4 8 5 4 4 4
Positive Screen 0 0 0 0 0 66 65 62 61 69 47
Restricted Screen 2 6 2 18 52 7 11 1 3 8 0
No Screen 22 3 24 14 32 14 7 23 23 10 40

Figure 6 shows that good performance on positive (green) criteria is attractive to these inves-
tors. Proxy voting means that the fund votes its proxies on CSR issues.

All the SRI mutual funds publish their principles of investing, including the CSR criteria they use.
But with over 700 SRI funds, many with a short track record, it is doubtful whether it is useful to
summarize all the CSR criteria being used. Figure 6 is a relatively good indicator of the market
since the funds included all have at least several years of performance data and are leaders in
assets.

The use of CSR criteria by SRI funds provides us with an excellent opportunity to learn by proxy
what kinds of CSR are profitable. As the SRI market grows, SRI funds will develop their special
set of CSR criteria that they think will increase profits. Over time the market performance of the
funds will tell use which CSR criteria are really correlated with profits. We can also expect the
market to become more specific. To compete, SRI funds will have to refine their CSR criteria so
they can distinguish themselves from competitors. It is not competitive to be one of 50 funds
that says they use “environmental” criteria; to break out of the pack the criteria need to be more
specific, such as “clean energy sources” or “reduction of toxic chemical use”. This will further
clarify how to make money with CSR.

Core CSR Criteria from the Market

There are hundreds of criteria for CSR used by SRI funds. We face several challenges to “boil
them down” to find the core criteria and answer the question, “What do responsible investors
really want?”

The first challenge is that the details about criteria used vary greatly between SRI funds. While
all of them mention their main criteria, such as environmental performance or human rights or
empowerment of women, most do not provide much detail. Most describe only a few CSR crite-
ria; the typical fund has four or five that are included in its market materials. But some funds are
very detailed, and a few are totally proprietary and release very little information at all.

Although it is possible to make a database of all the CSR criteria used by all the known SRI
funds, these problems would make any statistical analysis relatively meaningless. The common
criteria are so broad, considered this way, that we can already predict that they would be
lumped around a few performance areas such as environment, human rights, and health and
safety. Attempts to get more information from fund managers quickly lead to a dead end, as
several surveys have discovered. Fund managers consider the details of their CSR assess-
 58

ment to be a trade secret and competitive edge. They don’t generally give that information
away.

However unlike the funds, the SRI indexes do provide detailed information about their criteria.
The indexes are all designed and managed by profit-motivated private companies. They design
their index to have competitive financial performance and CSR performance. Their customers
are professional fund managers who pay for the information and credibility. We believe that the
criteria used by the SRI indexes are the best proxy available for the market’s opinion about CSR
and profit. If we can identify the core CSR criteria used by the market indexes, we can recom-
mend a model of CSR that is designed to increase shareholder value.

We feel we can overcome the challenge of market representation by using the SRI market in-
dexes as our proxy. There are 14 indexes to date, of which 12 publish their CSR criteria. There
are over 200 criteria used in total. This gives us a basis for finding the core criteria.

The second challenge is semantics. Even when the criteria are given in detail, they have to be
interpreted. For example one index fund includes “social utility” as a criteria but gives no further
detail. What does this mean? How does it compare to “social benefits” that are considered by
some other funds? Again, without detailed information we are left with our own judgment to
make a semantic analysis and cluster concepts together.

We reviewed several academic sources for cluster analysis methods, including Aldenderfer and
Blashfield,117 and Bailey.118 The methods they describe are appropriate for surveys using pre-
defined variables. In situations where the variables themselves are defined by the field, such as
the criteria used by SRI funds, there remains the problem of determining what the variables
mean. And since our variables and structure were not predefined, we need some framework for
creating clusters. We also feel that the framework should be clearly linked to performance
management and value creation.

We decide to overcome the problem of semantic clustering by using the Criteria for Perform-
ance Excellence from the Baldrige National Quality Program in the USA. This framework has
seven main categories and 19 sub-categories for performance measurement. We can cluster
the market CSR criteria in this framework and identify the most common and important CSR
concepts that are interesting to SRI professionals.

The first part of our investigation was to find the core CSR criteria used by the 12 SRI indexes
that publish their methods. With a population of 202 criteria, many of them similar, we need to
cluster them to identify the core concepts that are interesting to investors and also make sense
in an organizational framework. We followed these steps

1. Semantic Analysis and Rewrite: Many of the criteria obviously mean the same
thing but are some are written differently or vaguely in comparison with related criteria.
First we had to study all 202 criteria to determine what each one means. In many cases
where criteria were vague (for example, “social utility” is one criteria – what does this
mean?) we had to read in detail both the primary literature published by the index com-

117
Aldenderfer, M.S. and R. K. Blashfield, 1984, Cluster Analysis, Sage Publications, London,
Thousand Oaks, New Delhi, 88 p.
118
Bailey, K. D., 1994, Typologies and Taxonomies: An Introduction to Classification Tech-
niques, Sage Publications, London, Thousand Oaks, New Delhi, 96 p.
 59

panies, and also the secondary literature about the SRI industry. A set of common
terms for criteria were established. Of course this introduced judgment by the investiga-
tor into the process but this is unavoidable when we have to study concepts rather than
measurable items.

2. Frequency Cluster: We then sorted the criteria alphabetically to count the criteria by
conceptual groups. The results are listed in Table 2. It shows the most popular criteria
used by the SRI indexes.

3. Performance Category Cluster: We needed to cluster criteria by management

concept to relate them to organizational performance. We used the criteria from the
Baldrige National Quality Program in the USA (which is the model for the national quality
programs in many countries, including Peru).

Table 7 lists the positive criteria used by the 12 indexes according to their frequency. Health
and safety is mentioned the most often, included in 9 indexes. Criteria that are only mentioned
by one index are not included. (For all the criteria used by the Indexes see Appendix 2). The
frequency is also expressed as a percentage of the 12 index groups.

The most significant observation from this distribution is the strong focus on internal employee
relations for CSR, such as health and safety, labor relations and pollution prevention. It is not
surprising that investors understand that good performance is created by a good business cul-
ture. It emphasizes that CSR programs should focus on internal development first, and external
efforts second. It should also be noted that three of the dominant criteria are often integrated:
training and education leads to pollution prevention which improves health and safety.

It is useful to compare this result with similar investigations. As discussed earlier, the Europe
Campaign for CSR conducted a survey of European SRI retail funds. Table 7 shows the posi-
tive CSR criteria used by these SRI funds, arranged by order of frequency. Environmental per-
formance dominates the most popular criteria.

The most striking difference between the SRI market index criteria in Table 10 and the 2002
survey of European investors is that the indexes appear to value corporate governance and
human rights more strongly. This might be explained by the fact that most of the European in-
vestment is in that region, where governance and rights may not be considered as significant
risk factors for most corporate investments. In comparison, many of the indexes are designed
for global relevance, where governance and rights are more important to risk and return.

Table 7: Frequency Analysis of CSR Criteria in Market Indexes of "Responsible"

Corporations

Frequency CSR Criteria Frequency CSR Criteria

9x = 75% 4x = 33% Communication
Health and safety Discrimination
 60

Legal compliance
8x = 67% 3x = 25% Contracts
Corporate governance Codes of ethics
CSR performance re- Animal relations
porting Risk management
Labor and union rela- Environmental performance
tions Relations to customers and
Pollution prevention suppliers
Energy sources
6x = 50% 2x = 17% Leadership and incentives
Training and education Management
Quality Non-executive director remu-
Compensation neration
Diversity Conduct of business
Sustainability assessment
Rights Management
Profit sharing
Family support
Product safety
Recycling
Environmental management
system
5x = 42% Innovation
Benefits
Human rights

However, the 2003 survey of European investors, a year later, shows a significant increase in
the importance of governance. About 70% of funds surveyed said that governance was sys-
tematically included in investment analysis. This corresponds in time to significant publicity
around the world about corporate governance scandals and proposed governance legislation. It
is not surprising that governance has increased in importance to investors recently.

Model for Investor-based CSR in a Quality Framework

Frequency analysis tells us what CSR criteria are popular among SRI market indexes. But it
does not support implementation of the criteria in an organization. Some system to cluster the
criteria around core performance systems must be used. We chose the Criteria for Perform-
ance Excellence of the USA Baldrige National Quality Program. (see Chapter 1 for a discussion
of the Baldrige program).

“Baldrige” is now the basis for national quality programs in countries around the world, includ-
ing Peru. The Baldrige performance criteria are organized in seven major and 19 minor cate-
gories for performance excellence. Detailed guidance for interpreting the Baldrige criteria are
available from most national quality programs. Already Baldrige has been recognized by a
number of authors as a good foundation for environmental management and has been used by
several leading companies for CSR.
 61

After clustering the SRI index criteria by semantics, we clustered them using the Baldrige crite-
ria. This showed us the process similarities between the criteria. As a comparison, we also
clustered the detailed elements for sustainability reporting from the GRI using the Baldrige crite-
ria. Finally we examined each CSR cluster to identify the most significant two or three ele-
ments.

The results of this last step are shown in Table 8. This is the summary output of our original
research. The left column lists the criteria for performance excellence from the latest guideline
of the USA Baldrige program. The core market criteria for CSR in the right column show the
closest conceptual and frequency correspondence with the Baldrige criteria. So to know what
most responsible investors desire for CSR, see the right column. To learn how to implement the
processes for CSR in your organization, see the left column.

To read Table 8, think like an executive with a problem: “How do I manage [CSR Issue] in a
way that adds value in our management system?” First, look up the CSR problem on the right,
then see the corresponding management performance criteria to his left. Next, read the Guid-
ance to the Baldrige program for more information about how to manage that performance crite-
ria and how to integrate it with other ones. Then think about how the CSR issue can be man-
aged in the organization. More support is usually available from local quality promotion organi-
zations. If an organization wants to make a public report about its CSR efforts, using a quality
framework, it can follow Appendix 3 to see the specific correspondence between the GRI guide-
lines and the Baldrige system.
 62

Table 8: Clustering of Core Investor-based CSR Criteria in a Quality Framework

Baldrige Performance Criteria Core Market Criteria for CSR

1.1 Organizational Leadership
a. Senior Leadership Direction CSR and sustainability vision and policy
b. Organizational Governance Good governance
Leadership structure
c. Organizational Performance Review
1.2 Social Responsibility
a. Responsibilities to the Public Responsiveness
Beyond compliance
b. Ethical Behavior Codes of conduct
c. Support of Key Communities Philanthropy
Consultation
2.1 Strategy Development
a. Strategy Development Process CSR in strategy development
b. Strategic Objectives Risk management
Environmental and social strategies
2.2 Strategy Deployment
a. Action Plan Development and Deploy- CSR programs
ment
b. Performance Projection
3.1 Customer and Market Knowledge Stakeholder knowledge
3.2 Customer Relationships and Satis-
faction
a. Customer Relationship Building Customer relationships
Supplier relationships
b. Customer Satisfaction Determination Customer satisfaction
4.1 Measurement and Analysis of Organizational Performance

a. Performance Measurement Sustainability assessment

b. Performance Analysis
4.2 Information and Knowledge Man-
agement
a. Data Information and Availability Public reporting
Labeling and advertising
b. Organizational Knowledge Networking
- continued next page
 63

- Table 4 continued

Baldrige Performance Criteria Core Market Criteria for CSR

5.1 Work Systems
a. Organization and Management of Work Labor management and relations
b. Employee Performance Management Compensation
System
c. Hiring and Career Progression Discrimination
Diversity
5.2 Employee Learning and Motivation
a. Employee Education, Training and De- Training
velopment
b. Motivation and Career Development Profit sharing
5.3 Employee Well-Being and Satisfac-
tion
Work Environment Health and safety
Employee Support and Satisfaction Non-mandated benefits
6.1 Value Creation Processes Pollution prevention
Innovation
6.2 Support Processes Supplier CSR
EHS management systems
7.1 Customer -Focused Results Sustainability benefits to customers
7.2 Product and Service Results Resources use
Waste and emissions
Product certifications
7.3 Financial and Market Results Profit distribution
Taxes and subsidies
7.4 Human Resource Results Health and safety results
7.5 Organizational Effectiveness Results Certifications of processes
7.6 Governance and Social Responsibil- Compliance
ity Results
Awards
Social and environmental impacts

Table 8 represents two steps forward to understanding how to promote CSR. First, this model
supports CSR implementation the right way. Integrating CSR into an existing and respected
performance standard gives it more credibility to executives. And because Baldrige is the basis
for national quality programs around the world, help is locally available to most companies that
want to use the system. A company can use this model to design its CSR program and get both
CSR and quality benefits.

Implementation is also supported because this model is specific enough that detailed technical
assistance (TA) is available. There are TA and “best practice” resources, many of them free of
charge and available over the Internet, for every one of the CSR criteria in Table 4. This is im-
portant because most models of CSR discuss concepts that are too broad to be useful for most
managers. Discussions about “sustainability” and “rights of society” do not have much practical
use. However, details of CSR such as “product certifications” and “labor relations” are relevant
immediately and resources can be quickly found on the Internet because the concepts are spe-
 64

cific. Extensive help is freely available about all aspects of CSR, if the topic is defined specifi-
cally as in this model.

Second, the model is based on the right customers for corporate managers: The shareholders.
The CSR criteria in this model come from the market, not from philosophy or advocacy. They
show clearly what a corporate CSR program should achieve to attract investors. An executive
can see the path: CSR criteria – CSR program – Public Report – More Investors and More
Value. Our discussions with top executives about about the model and roadmap show that they
quickly understand the ideas and they like them. They see the business case for CSR – from
their point of view - right away

To link the model with investor communications, we used it to cluster the detailed reporting ele-
ments from the Sustainability Reporting Guidelines of the Global Reporting Initiative. Appendix
X shows the full integration of the Baldrige model, CSR criteria from the market, and the report-
ing criteria of the GRI. Reading from left to right across a row in the table we can see what is
the organizational performance area, what are the core CSR concerns, and where to find guid-
ance on measuring and reporting them.

Limitations of the Model

Some concerns must be discussed. First, personal judgment is needed to interpret some of the
CSR criteria and it is certainly needed to cluster them around common concepts. Statistics can
be used only for frequency analysis – statistics are not helpful for understanding what the words
mean. Another investigator with different judgment could produce a different combination of
core criteria. However we believe that the core criteria would not change significantly in the
hands of another investigator because most of the semantic similarities are relatively obvious.

Second, the model may be considered too complex for many organizations, especially small
and medium enterprises (SMEs). This is certainly a valid concern since the objective of the in-
vestigation was to produce a model that is actually useful to most companies.

For SMEs the model is valuable as a guide for planning. Not all the CSR criteria will be relevant
to most SMEs. But all the performance categories are relevant. SMEs should use quality man-
agement and performance measurement. This model shows the key CSR topics that SMEs
should include in their performance systems. The issue of complexity has already been ad-
dressed by the Baldrige program and similar national quality programs around the world. A ma-
jor target of these programs is the SMEs, who need simple tools. So many programs offer and
support a simplified version of the quality model that is more suitable for small organizations.
They can help users apply this CSR model even in a more simplified framework.

Simplifying the framework is not difficult. The Baldrige model includes 19 criteria in seven cate-
gories. But we can easily summarize the CSR criteria around the 7 categories. For example,
Category 5, Work Systems, has 7 performance criteria and 8 corresponding CSR criteria. We
could summarize all 8 CSR criteria into one major category, Work Systems, with 3 CSR con-
cepts – labor relations, training and health and safety. Therefore we do not feel that the model
is too complex. It can easily be simplified, and more simple versions of the quality framework
are already available from national quality promotion programs. The real value of the model is
to help executives, even small business managers, to think about what criteria for CSR are im-
portant and how will they implement it.
 65

Model Validation

We used the SRI market indexes as a proxy for the universe of CSR criteria used by investment
funds. To test whether our proxy represents actual SRI funds, we compared the criteria in the
model to the criteria used by 12 leading SRI funds with international investments that are
tracked by the Social Investment Forum in the USA. Table 9 lists the funds we examined.

Table 9: Model Benchmarking: Leading SRI Mutual Funds 119

Fund Family Name Fund Family Name

Ariel MMA Praxis
Calvert Neuberger Berman
Citizens Parnassus
Domini Pax World
Enterprise Portfolio 21
Green Century Sierra Club
Walden

All these funds provide a prospectus that is their formal statement of investment practices and
principles. This includes their criteria for SRI. As an example, SRI principles are described in
the prospectus of the Calvert World Values Equity Fund, which was established in 1992 and
now has over $250 million in assets under management. The Calvert statement of criteria for
SRI is a good example of other leading SRI funds. Its criteria for SRI are:

“[The Calvert World Values Equity Fund] is socially screened according to criteria listed be-
low. Calvert believes this screening process helps to identify companies with strong man-
agement and solid business practices, thereby providing the best opportunity for long-term
success. We seek to invest in companies that:
• Strive to reduce their impact on the environment, through positive programs
• Have a record of positive labor relations, including promoting women and ethnic mi-
norities, respecting the right to form unions, complying with applicable labor laws and
providing good health and safety standards
• Produce or market safe, healthy and useful products or services
• Are responsible corporate citizens in the communities where they operate

We avoid investing in companies that:

• Are major polluters or have consistent environmental compliance problems
• Are primarily engaged in nuclear power
• Have a record of poor labor relations
• Demonstrate a pattern of engaging in forced, compulsory or child labor
• Are significantly engaged in the manufacture of weapons, tobacco, alcohol or are in-
volved in gambling operations
• Participate in the systematic denial of basic human rights
• Fail to meet international standards in their overseas operations”120

119
as listed by the Social Investment Forum, www.socialinvest.org, May 2004
120
Calvert 2003. Prospectus, Calvert World Values Equity Fund. Calvert Group, Bethesda MD
 66

We reviewed the prospectus for each fund listed in Table 9. We found that all of the positive
criteria used by these funds are included in our model. Therefore we think it is a good
proxy for this SRI group. In other words, a corporation that uses our model for its CSR program
would be interesting to this investor group.

In this investigation we have a particular interest in the application of the results to Peru, and to
Less-Developed Countries (LDCs) in general. The amount of investment by SRI mutual funds
in LDCs is still very small. However there are some funds that do specialize in LDCs and
emerging markets. A recent survey identified SRI funds that specifically invest in emerging
economies.121 Table 10 lists those funds (none of them invest in companies in Peru). We re-
viewed the marketing information for these funds, where it was available, and compared their
use of positive screens to the model.

Table 10: Model Benchmarking: SRI Mutual Funds With Investments in Emerging Mar-
kets

Fund Family Name Fund Family Name

Aberdeen World Ethical Fund
ABN AMRO Ethical Fund
African Harvest Women`s Initiative
Fund
Calvert World Values International
Equity
Community Gilt Fund
Community Growth Fund
Ethical Funds
Ethical Global Growth Fund
Fraters Earth Equity Fund
Friends Provident Stewardship Inter-
national
Futuregrowth Albaraka Equity Fund
Glebe Pan Asian Growth Trust
Henderson Funds
Investors Group Summa
Jupiter Ecology Fund
Kingsway Funds
Mackenzie Universal Global Ethics
Cap Class
Mayban Ethical Trust Fund
Meritas International Equity Fund
MMA Praxis International
NPI Global Care Growth (OEIC, ISA)
Samsung Eco Equity Fund
United Global UNIFEM Singapore
Fund

We found that our model includes all the criteria used by the SRI funds that invest in
emerging markets. In fact we found that most of these funds use relatively few criteria. For
example two of them only invest in companies whose mission is to promote the economic de-
velopment of women or who have particularly good performance in that area.

This is not a surprising result. Corporate development in many emerging markets is still at a low
level. SRI funds in emerging markets cannot use too many CSR criteria or they will have no-
where to invest. As our model identifies (not prescribes) a broad range of CSR criteria, we feel
that a corporation in an emerging market that uses it will be interesting to SRI funds that invest
in those markets.

121
IFC 2003. “Towards Sustainable and Responsible Investment in Emerging Markets: A Re-
view and Inventory of the Social Investment Industry’s Activities and Potential in Emerging Mar-
kets.” International Finance Corporation, Washington DC. October 2003
 67

As a final benchmark we compared our model to one of the newest models used by a leading
investment bank. In 2003 the IFC published Measuring Sustainability: A Framework for Private
Sector Investments. This was developed after extensive consultation with leaders in sustain-
ability practice around the world and within the IFC and World Bank group. We believe it is a
good example of best practice in sustainable investment, and its criteria for CSR and sustain-
ability are good benchmarks for our model. Table 9 summarizes the criteria used by the IFC
framework.

Table 11: IFC Criteria for Measuring Sustainability in Investments

Environmental Management
Corporate Governance
Accountability and Transparency
Eco-Efficiency and Environmental Footprint
Environmental Performance of Products and Services
Local Economic Growth and Partnerships
Community Development
The Health, Safety and Welfare of the Labor Force

All of the criteria in the IFC framework are included in our model, and in greater detail.
Therefore we believe our model is applicable to operations of the IFC and the World Bank
Group and to other development financing institutions.

The model of investor-based CSR is generally relevant to companies in any country that are
concerned about their investors or shareholder value. It is new research; in fact it could not
have been produced three years earlier because the SRI market indexes and most of the SRI
funds are only a few years old. It is an answer to the question, “How, specifically, does CSR
increase shareholder value?” In this investigation, we are letting investors tell us. It is also an
answer to the question, “How do we implement CSR?” By integrating the CSR core criteria with
the Baldrige criteria for performance excellence, a company has a firm foundation for develop-
ing its CSR program and receiving local support. Of course investors will be just as happy to
see a sound quality management program as a sound CSR program, so the combination of ele-
ments should be particularly effective at attracting investment.

The rapid growth of SRI leads to one final caveat for this model: By definition it is always in
evolution. The 12 SRI market indexes from which we draw our population of CSR criteria is it-
self in evolution. We expect that their CSR criteria will be adjusted as investors learn more
about what types of CSR correlate with performance.

CSR Assessment Tool for Investor Communications

We developed a CSR assessment tool that uses the core market criteria for CSR. The survey
lists the core CSR criteria in Table 3 above, and asks the respondent how well they can talk
about each criteria with existing or potential investors. A corporation that can describe in detail
how it manages all the issues will be interesting to SRI funds (of course that does not mean the
funds can or will invest in the Peru companies, due to other factors). One that has nothing to
 68

say about most of the issues could have unrecognized environmental or social risks. This tool
can be used by companies to evaluate themselves and by investors to evaluate companies.
Figure 15 shows the tool.

Figure 12: Survey and Self—Assessment Tool for Corporate Social Responsibility and Socially
Responsible Investing
Cuestionario y Herramienta de Auto-valoración para Responsabilidad Social Corporativa e Inversión
Socialmente Responsable
Guía de Respuesta
Califique cada criterio de acuerdo
con las siguientes respuestas
Aviso
* Todas las respuestas positivas *
deben ser soportadas por
documentación
0 = Sin capacidad
No se tiene algo que decir al respecto
1 = Con poca capacidad
Se está considerando y se puede
describir su aproximación
2 = Alguna Capacidad
Se puede describir pocas actividades y
responsabilidades
3 = Buena Capacidad
Se puede describir algún programa
en detalle para este punto
4 = Excelente capacidad
Se puede describir plenamente la
política, programa y resultados para este
punto, O se puede proveer los reportes
oficiales de RSC
69
Califique la capacidad de su compañía para comunicar a sus inversores
acerca de Responsabilidad Social Corporativa (RSC)
Criterios de RSC utilizados por los inversores 0 1 2 3 4
RSC y visión y políticas de sostenibilidad
Buen Gobierno
Estructura de Liderazgo
Sensibilidad
Más allá del cumplimiento
Códigos de Conducta
Filantropía
Consulta
RSC en el desarrollo de la estrategia
Gestión del Riesgo
Estrategias medioambientales y sociales
Programas de RSC
Conocimiento del accionista
Relaciones con los clientes
Relaciones con los proveedores
Satisfacción del Consumidor
Valoración de la sostenibilidad
Reporte Público
Nombramiento y Publicidad
Red de trabajo
Relaciones y Gestión del trabajo
Compensación
Discriminación
Diversidad
Entrenamiento
Participación en las ganancias
Salud y Seguridad
Beneficios no obligatorios
Prevención de la Contaminación
Innovación
RSC del proveedor
Sistemas de Gestión EHS
Beneficios sostenibles para los clientes
Uso de recursos
Desperdicios y Emisiones
Certificaciones de Productos
Distribución de Beneficios
Impuestos y Subsidios
Resultados en Salud y Seguridad
Certificación de Procesos
Compromiso
Premios
Impactos ambientales y sociales
 70

Chapter Conclusion

We investigated the CSR criteria used in SRI to identify the core or common criteria. We con-
ducted semantic and frequency analysis to identify the most common criteria, and we summa-
rized them in a quality management framework that links each criteria to a recognized area for
organizational performance excellence. This gives us a model for investor-based CSR. We
validated the model by comparing it to the actual criteria used by leading SRI funds and by SRI
funds that invest in emerging markets. We used the model to develop a self-assessment tool
that companies can use to evaluate their ability to talk to existing and potential investors and
customers about their CSR performance. We expect this tool will be valuable to any company
that wants to improve its CSR and also to be more attractive to investors.

The next chapter describes how this model can be used in Peru, an example of many Less-
Developed Countries and emerging markets.
 71

Chapter 4. Strategy in Peru for Promoting Investor-based

Corporate Social Responsibility and Socially Responsible In-
vestment
Overview

The first chapter of this report described the SRI market and its performance. The second
chapter covered some important trends, including SRI in emerging markets. The third chapter
presented a model for CSR based on new research into the criteria used by SRI market in-
dexes, and by proxy the SRI market in general. In this chapter we discuss how to use this in-
formation and new knowledge in Peru.

Knowledge about Corporate Social Responsibility is relatively advanced in Peru. There are
NGOs, university programs, government offices and consulting firms that specialize in CSR and
that participate in international networks for CSR. Most of the large corporations in Peru have
social support programs of some kind. Some companies in Peru have achieved certification to
international CSR standards for environmental, social and safety management.

However there is no evidence of the formal use of CSR criteria for investment or lending in
Peru. This is not a criticism, because it is not a surprise. Socially Responsible Investing using
CSR criteria has grown significantly in developed countries only in the last few years. The ma-
jority of investors in those countries still do not use SRI principles (although surveys indicate
that many more investors will use them in the future). There is no reason at this time to expect
SRI activity in developing countries such as Peru. But, as Chapter 2 shows, there are signifi-
cant trends that make it inevitable that SRI will become important in Peru. Globalization is
bringing the financial markets of Peru and the developed countries closer together. And SRI is
already a significant force in developed markets.

An active strategy in Peru for SRI could significantly promote the spread of CSR in Peru and
attract more international investment and buyers. Companies in Peru can be motivated to im-
prove their CSR performance if they believe it will help them attract investors and improve their
credit risk. Investors in Peru can use SRI to improve their investment performance and also en-
courage more CSR.

This chapter presents a strategy for promoting CSR through SRI in Peru. The steps in the
strategy are presented in recommended order of implementation.

Phase 1. Coordination and Capacity Building

Help stakeholders in Peru understand investor-based CSR and the key resources avail-
able. Create coordination mechanisms and activities. Improve the principles of Corpo-
rate Governance to include more specific guidance on CSR in governance.

Phase 2. Sector Activities

Recommendations for banking, foreign direct investment, microfinance and the national
stock exchange.

Phase 3. Promoting CSR Through Pension Fund Investment

 72

Show how a small amendment to the regulation of the national pension funds could sig-
nificantly advance CSR and SRI in Peru and contribute to the sustainability of the pen-
sion system.

The model of investor-based CSR that we present in Chapter 3 can be developed with a local
interpretation during Phase 1. Then it can be applied in Phases 2 and 3.

It is not our objective to describe in detail the many aspects and activities of CSR in Peru. Nor
will we include much statistical information about Peru markets and investments. Background
information and analysis about all the topics we cover in this chapter are available from other
sources. We will provide references to some of the important literature that help to understand
key areas.

The topics are developed in a linear framework. Each section describes a key issue, how it can
be helped with SRI and CSR, and what specific organizations and agencies can do to advance
the sustainable development of Peru in the topic. The sections are arranged in a recommended
order for implementation. They begin with coordination and capacitation, and then become
more specific in application. In this way the chapter is a step-by-step strategy for promoting SRI
and CSR in Peru, with specific recommendations.

Corporate Social Responsibility in Peru

Aguero conducted an extensive study of the development of CSR in various Latin American
countries. 122 He found that CSR was started and is still promoted by small groups of business
executives and visionary leaders in society and academia. Often their commitment is to sus-
tainable development of their countries, not to CSR per se. This is reflected in the fact that in
most Latin American countries an existing business association has become a national chapter
of the World Business Council for Sustainable Development. Of course these are not the only
business associations in the countries that are concerned with CSR. But they do have a direct
connection to the global network for CSR promotion and technical development

Peru follows this pattern. Aguero found that in the early 1990s in Peru a small group of leaders
in business and society were very concerned about the future direction of the country. They felt
that business leaders had to take an active role in social policy. In 1994 this group founded the
non-profit group Peru 2021. Since then it is the leading organization in Peru that promotes
CSR. More details are available on their website, www.peru2021.org.

Among its other activities, Peru 2021 sponsors an annual competition for CSR in Peru compa-
nies and awards prizes for CSR at its annual conference. This occurs in early December, fol-
lowing the national Month of CSR in November. This is organized by a multi-stakeholder group
and includes many events around the country to improve awareness and practice of CSR.

The technical administration of the national CSR competition is managed by the Universidad de
Pacifico (UP), which uses the results for case studies and research in its area of excellence in
CSR within the Centro de Investigacion UP (CIUP). The CIUP has published many papers

122
Aguero 2002. Business Social Responsibility in Latin America: Argentina, Brazil, Chile, Co-
lombia, Mexico, and Peru. F. Aguero, Miami University. Unpublished manuscript. Ford Foun-
dation.
 73

about CSR in Peru, many of which are listed in the web pages of UP professors. It is also in-
volved in several international networks and projects for CSR.

Because it is developed by a multi-stakeholder group, and informed by academic research, the

criteria for CSR used to evaluate companies in the national CSR competition for Peru is the best
“working” definition of CSR in Peru. The criteria are included in Table 12.

Table 12: Criteria Used in the National CSR Competition of Peru

PROPUESTAS Y CRITERIOS DE EVALUACIÓN 123

Las postulaciones deberán presentarse de acuerdo con los formatos adjuntos a este
documento. En dichos formatos, se solicitará información acerca de la empresa
(ANEXO I), actividades, giro de negocio, sus políticas y el nivel de participación en acti-
vidades o proyectos de Responsabilidad Social, haciendo hincapié en los siguientes cri-
terios de evaluación:

Principales Criterios

Medio Ambiente
- Políticas y operaciones
- Manejo de los desechos
- Prevención de la contaminación
- Eficiencia en el uso de la energía y agua
- Indicadores de impacto de la Gestión Ambiental

Ambiente laboral
- Prácticas generales de empleo
- Diversidad, género y respeto
- Entrenamiento, Educación y Desarrollo Profesional
- Balance entre Trabajo y Vida Personal
- Salud y Seguridad
- Medición del clima laboral

Desarrollo de la Comunidad
- Voluntariado Corporativo
- Filantropía
- Otros temas

Criterios Adicionales

Fundamentos de la empresa
- Visión y Misión
- Reportes de sostenibilidad
- Política Social de la Empresa

123
Peru 2021, 2004. Premio Peru 2021 a la Responsabilidad Social y Ambiental. Bases del
Concurso. Peru 2021, Lima, Peru.
 74

Relación con los clientes

- Marketing de Productos y Servicios
- Políticas de información al cliente (contenido del producto, elaboración, etc.)
- Otros

Proveedores
- Homologación de proveedores
- Transferencia de tecnología
- Selección y exigencias en el cumplimiento de estándares

En el ANEXO II y ANEXO III se deberá presentar el caso o iniciativa de RSE con el que
desea postular cada empresa. Los criterios de evaluación de éste se basarán en los si-
guientes aspectos:
- Consistencia con la política Social de la Empresa
- Definición del público interesado (stakeholder) involucrado en la iniciativa
- Alianzas Estratégicas
- Involucramiento del personal de la empresa
- Mecanismos de comunicación y consulta
- Objetivo del proyecto
- Indicadores de medición de impacto y éxito del proyecto
- Soluciones implementadas y sostenibilidad en el tiempo
- Resultado del proyecto
- Impacto/beneficios para:
Comunidad
Medio ambiente
Clientes
Proveedores
Trabajadores

- Beneficios para la Empresa

- Recursos destinados: Propios y de terceros.
- Número de beneficiarios:
Directos
Indirectos

The prizes awarded in 2003 for this contest show a strong emphasis on community relations
and support. These criteria show a strong focus on projects oriented to community support.
This is the same focus that appears throughout the literature on CSR and on current efforts to
promote CSR. Appendix 2 is a bibliography of the literature on CSR in Peru.

We observe that concepts and criteria for CSR in Peru are significantly different from the
criteria for CSR used by SRI funds and indexes. The focus in Peru is on social development
projects by companies. Internal CSR process management is considered but it is not the main
focus. In contrast, most of the CSR criteria used by SRI funds are focused on internal man-
agement structures. Social development projects and stakeholder support certainly are consid-
ered by SRI funds and indexes, but they are more interested in the management capacity of the
company to be responsible. One assumes that good CSR management processes will lead to
more social development projects in the style of CSR in Peru.
 75

This raises a critical issue for Peru: How to harmonize the definitions of CSR used by SRI funds
and indexes with the existing focus on CSR in Peru? We do not regard these as competing ap-
proaches. Rather they are complementary. The approach to CSR in Peru has its roots in the
desire of companies to contribute the sustainable development of their country and their stake-
holders, in particular their local communities. Obviously this focus should not be lost or substi-
tute for a focus on management. But increasing or improving the focus on internal man-
agement processes in the CSR programs in Peru would strengthen the programs and
promote more long-term social development.

Table 13 includes prominent Peru organizations that have significant interests in CSR and in
SRI. This is not an exclusive list, there are many more organizations in Peru with interests
these topics. But these organizations could benefit significantly from promotion of SRI.

Table 13: Peru Organizations with Significant Interests in CSR and SRI

• Peru 2021: Business NGO focused on CSR; sponsors national CSR awards; national
chapter of World Business Council for Sustainable Development
• Universidad de Pacifico: Manages the CSR award program and writes case studies
about participants.
• Centro de Eficiencia Tecnologia: Donor-funded NGO that provides technical assis-
tance in cleaner production and social accountability; national point of contact for the
global CP technical network.
• Consejo Nacional de Ambiente: Promotes CP and ISO 14000 environmental stan-
dards; facilitates development of environmental practice guidelines for industry sectors.
• Proinversion: State agency for private sector investment promotion; affected by CSR
concerns of foreign direct investors.
• COFIDE: Development and investment bank; affected by CSR concerns in banking with
international partners.
• ASBANC: Banking trade association; affected by CSR concerns in banking standards
and practice.
• Bolsa de Valores: Stock exchange; affected by international SRI fund concerns about
CSR of listed companies.
• Sociedad Nacional de Industrias: Manages national quality award which includes cri-
teria for CSR.
• Asociacion de AFPs: Represents the AFPs; affected by international practices of SRI
in pension fund regulation and investment

There is certainly some corporate and other business interest in CSR in Peru. Many of the
leading corporations in Peru have active programs of community support, and some use cleaner
production principles in their operations. Obviously all the companies that enter the national
CSR competition feel they are responsible. Many of the government ministries support CSR
programs for the sectors they regulate. Considering that CSR covers a broad range of business
interests and impacts, we could argue that a large proportion of the corporate and government
sectors in Peru are involved with CSR in some way.
 76

As we have emphasized, it is not our intention to describe what everyone is doing about CSR in
Peru. However we can easily describe what everyone is doing “officially” about SRI at this time
in Peru: Nothing. There are no investment funds that promote their SRI principles. We could
not document any formalized use of CSR criteria in investment. That does not mean CSR is not
considered – all the investment professionals we met said that CSR is “important”. But none
had an organized approach to evaluating CSR. We also found that many investment profes-
sionals had only basic awareness of organizations like Peru 2021 or the CET, which are the
most visible organizations in their field.

Peru is in a good position to start working on SRI. There are organizations in place that can
help investors. The CSR network can support investigation, awareness and training. There are
companies and projects in Peru that should appeal to SRI fund managers, if they can learn
about them. SRI is already affecting the parent corporations and large international investors in
some leading companies in Peru and the concern in the market about CSR and SRI is only go-
ing to increase.

Phase 1: Coordination and Capacity-Building

Improve Awareness of CSR and SRI

Before any serious attempts are made to promote investor-based CSR in Peru, the stake-
holders need to become aware of it and coordinate so they know what are the other local re-
sources available.

All the organizations listed in Table 13 can participate in a coordinated effort to promote both
CSR and SRI in Peru. But they have to know about first. The organizations should have some-
one on the staff who has a basic understanding of SRI and international trends in CSR. It is
also a good idea to at least have copies of the leading technical guidelines on CSR that are
relevant to the organization. For example, ASBANC should have copies of the technical guide-
lines for CSR management in financial institutions that are described in Chapter 2, and
ASBANC should at least promote them to its membership. They are free and best practice.

Besides best practices, stakeholders and potential supporters need to know “who is who” in
CSR in Peru. Such a list was recently requested by the IFC for consideration in design of a
CSR program for the banking sector in Peru. 124 Representatives of Proinversion report that
buyer representatives from foreign companies are asking about CSR in potential suppliers in
Peru, and that a guide to CSR resources would be helpful.

Since there are many active organizations in CSR in Peru, an advisory committee could be
used to design the navigation structure and criteria for listing in the guidebook. The guidebook
should have a complementary website with a memorable name like www.RSEPeru.org or
something similar. This is a relatively simple and inexpensive project that could be supported
by donations from corporations in Peru that already are practicing CSR. They should know
which CSR organizations are particularly helpful, and it is also good advertising for them.

124
Personal communication, Alberto Morisaki, ASBANC, May 3 2004
 77

Recommendation 1: Each of the organizations listed in Table 13 should appoint someone

as their coordinator and specialist in CSR and SRI. This person
should learn about the resources and activities described in this re-
port.

Recommendation 2: One of the organizations listed in Table 13 should hold a roundtable

meeting with the others to learn about common interests in CSR and
SRI and discuss how it can be promoted in Peru. The UP would be a
good forum for this meeting. One product of this meeting should be a
short report of “Who Is Who” in CSR in Peru. This should be de-
signed to be useful to international investors and buyers who want to
know about CSR resources in Peru, as well as designed for local
companies.

Integrating Quality and Corporate Social Responsibility

Peru faces a challenge right now in the general perception of corporate social responsibility. In
Peru, CSR is generally seen as an obligation of business to society and as philanthropy or sup-
port to the community. But this is in fact only a small part of what international investors and
buyers seek in CSR. They define CSR as the integration of social and environmental manage-
ment into the basic business processes of companies. Support to society is seen as the conse-
quence of good internal management of CSR. If companies in Peru do not change their ap-
proach to CSR they may not be so interesting to international investors or buyers.

Chapter 2 began with a discussion about the links between quality and CSR. We cannot em-
phasize this linkage strongly enough. We showed that investors are primarily looking for indica-
tors for internal CSR management, across all the important functions of a company that add
value. Companies must use some kind of framework to manage all these indicators, and quality
management gives us the best possible framework. It has global support, extensive documen-
tation and technical resources, and is very relevant in Peru.

The national quality program of Peru is supported by the Centro de Desarrollo Industrial (CDI) in
the Sociedad Nacional de Industrias (SNI). It supervises the Premio Nacional a la Calidad,
which is given annually to companies in the sectors of products, services and PYMEs. The Pre-
mio Nacional a la Calidad is based on the Baldrige quality system, which as we have shown al-
ready includes CSR as a specific criteria performance excellence. It appears that the CDI has
the most expertise in Peru for both understanding quality management and delivering training
about it.

For companies in Peru to understand how to implement CSR at the process level, they will need
to understand performance management. The CDI can explain this to companies in Peru, and
suggest how the specific investor-based CSR criteria can be integrated in each category for per-
formance excellence. There are now technical guidance manuals for all of the CSR topics avail-
able for free from various development organizations. The CDI can understand more about the
link between specific categories of CSR and Quality by studying these manuals.

A partnership between CDI and Peru 2021 would create several opportunities. The two organi-
zations could produce a guidance manual for companies in Peru about integration of CSR in
quality management. The investor-based CSR model we present in this paper is expressly de-
 78

signed to help with this task. Such a guide would benefit both organizations and their members
or clients and significantly advance the practice of CSR in Peru to be more in line with the ex-
pectations of international investors.

A guide to quality and CSR would also be useful for improving the evaluation of CSR in the Na-
tional Quality Awards. These already include some mention of CSR in the guidance and
evaluation criteria for quality management. Peru 2021 and other CSR organizations could help
CDI to improve the integration and measurement of CSR in the national quality awards. It
would enhance the perception that CSR is good for business management, not just for the
community. This is critical for future foreign investment in Peru; international investors are look-
ing for internal measures of CSR, not for social philanthropy.

Recommendation 3: The Centro de Desarrollo Industrial (CDI) should establish a partner-

ship with Peru 2021 to build its capacity in CSR. The two organiza-
tions should share their knowledge and organize a joint awareness
event for the stakeholders in both the quality and CSR communities.

Recommendation 4: The CDI should use the CSR model in this report to create a guidance
manual for Peru industry that shows how CSR can be integrated into
each one of the Criteria for Performance Excellence and into com-
pany quality programs.

Recommendation 5: The CDI should use the CSR model in this report to update the criteria
used for evaluation in the National Quality Awards and ensure that
CSR is recognized throughout the evaluation system.

The other side to this approach is integrating quality into CSR programs. Peru 2021, in partner-
ship with the Universidad del Pacifico, conducts a Premio de Responsibilidad Social for compa-
nies in Peru. The prize is given every year at the annual conference of Peru 2021. The Univer-
sidad del Pacifico helps manage the program and the evaluations of participants.

As shown above, the criteria for the CSR awards are focused more on social projects than in-
ternal CSR management. We agree that this should continue, however we also feel that the
criteria and application guidelines should be expanded to include more internal management
elements. This will help companies with good CSR be more attractive now to international in-
vestors and bankers, and more attractive eventually to investors and bankers within Peru.

The investor-based CSR model in a quality framework presents Peru 2021 and the CDI with
opportunities for cooperation in education and training. CSR experts could participate in quality
training programs. Quality experts could participate in CSR programs. In the National Quality
Week, Peru 2021 could offer programs on CSR and quality. In the Month of Social Responsibil-
ity, CDI can offer programs on quality management for CSR.

Recommendation 6: Peru 2021 should use the CSR model in this report to update the cri-
teria used for evaluation in the National CSR Awards so it emphasizes
internal management processes that drive CSR performance. This
should be done in partnership with CDI.

Recommendation 7: Peru 2021 and CDI should hold a seminar to teach the business
members of Peru 2021 and their key suppliers about the national
 79

quality program and how they can use it together with CSR to improve
their competitive position and contribute to their society.

Improve the Management of CSR in the Principles of Corporate Govern-

ance in Peru.

Peru has adopted a set of principles for Corporate Governance. The Principios de Buen Go-
bierno para las Sociedades Peruanas were published in 2002 after development by a coalition
of organizations under the guidance of the Comisión Nacional Supervisora de Empresas y Valo-
res (CONASEV). One of the participating organizations, the Centro de Estudios de Mercado de
Capitales y Financiero (MC&F), has published extensive commentary about the Principios and
readers are referred to that organization for more information. The Bolsa de Valores de Lima
actively promotes corporate governance to listed companies, and 12 of the companies in the
Bolsa have formally adopted the Principios. 125

The Principios specifically address the rights of stakeholders and responsibilities of corporate
governance for sustainability:

Figure 13: Role of Stakeholders in Corporate Governance in Peru

Principios de Buen Gobierno para las Sociedades Peruanas

TITLE III. ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE

The corporate governance framework should recognize the rights of stakeholders as estab-
lished by law and encourage active cooperation between corporations and stakeholders
in creating wealth, jobs, and sustainability of financially sound enterprises.

A. The corporate governance framework should assure that the rights of stakeholders that
are protected by law are respected, such as workers, suppliers, and creditors.

B. Where stakeholders interests are protected by law, stakeholders should have the op-
portunity to obtain effective redness for violation of their rights.

C. The corporate governance framework should permit performance-enhancing mecha-

nisms for stakeholder participation.

D. Where stakeholders participate in the corporate governance process, they should have
access to relevant information.

In Chapter 2 we showed that CSR is becoming more included in standards and concepts for
Corporate Governance in developed countries. In Chapter 3 we showed that Socially Respon-
sible Investors include governance as one of the important issues they consider. In Chapter 4

125
website, Bolsa de Valores de Lima, May 2004
 80

we showed that governance is an important element of quality management standards and one
of the important criteria in the model of investor-based CSR.

Both governance and CSR are important for improving investment in Peru. But guidance is
needed to integrate these concepts. Besides Title III, there are a number of other elements in
the Principios where CSR could and should be emphasized.

Title IV of the Principios discusses disclosure and transparency. It specifically states that,

Disclosure should include, but not be limited to, material information on… Material fore-
seeable risk factors and the measures taken to reduce their impact, [and] Material issues
regarding employees and other stakeholders.

It is clear that social and environmental risks can be material and foreseeable for many compa-
nies in Peru, particularly in sectors such as mining, forestry, agriculture and manufacturing. But
in order to disclose such risks, companies need to know how to evaluate them, and sharehold-
ers need to know how to ask about them. It is also clear that social and environmental issues
can be material to employees and other stakeholders. Such issues include health and safety
management, use of hazardous materials, impacts on the environment and local communities,
and others.

Title V of the Principios discusses the responsibilities of the Board of Directors. It specifically
states that,

The Board of Directors should take into account the interests of stakeholders, always
ensuring compliance with applicable law.

This is a clear direction to consider CSR. Within the management of the Board of Directors
there are several important functions relevant to CSR. Special committees can be established
to promote and monitor CSR performance. Directors can receive reports on internal CSR man-
agement and external CSR issues for use in strategic planning. Directors can represent the
company to stakeholders and improve communication.

How can the Principios be used to encourage CSR in Peru? First, we observe that the Prin-
cipios themselves already require consideration of the interests of stakeholders, and they pro-
vide a foundation for CSR management. Second, we observe that the Principios were devel-
oped after extensive consultation and deliberation and their use is relatively new. It would not
be wise to suggest modifying the Principios at this time.

However, the Principios could benefit from supplementary guidance about managing CSR. In
particular, corporate directors need guidance about how to meet their responsibilities in CSR
that are expressed in the Principios. To develop such guidance requires participation from ex-
perts in both corporate governance and CSR. There are groups in Peru that could work to-
gether to develop this guidance. For example, the Universidad del Pacifico has extensive ex-
perience in CSR theory and practice, and the Centro de Estudios de Mercado de Capitales y
Financiero has extensive experience in governance theory (governance practice is not yet very
advanced in Peru).

There are also international development agencies that could support this effort. For example
the World Bank has programs on CSR, governance, and foreign direct investment. All of these
programs could benefit from guidance about how to specifically integrate CSR and governance.
 81

In particular the International Finance Corporation of the World Bank Group has a number of
investments in Peru. IFC is committed to sustainable development and CSR, and of course
also to governance to protect its investments. Other development financing institutions such as
the IADB and CAF also have strong interests in both CSR and governance.

Both governance and CSR will become much more important for attracting international invest-
ment to Peru. These topics need to be integrated and understood within Peru so companies
can take positive action. These actions should be focused on improving internal management
processes. The best framework for internal process management is the national quality program
administered by the CDI. The quality standards specifically link governance and CSR issues in
the category of Leadership, and show how they relate to other key processes such as employee
health and safety, and prevention of pollution.

Recommendation 8: The Universidad del Pacifico, the Centro de Desarrollo Industrial, and
the Centro de Estudios de Mercado de Capitales y Financiero should
collaborate to develop a supplementary guidance document to the
Principios for managing CSR in corporate governance. This should
follow the structure of the Principios and show specifically how CSR
can be managed in each relevant section. Support for this project
should be sought from the World Bank Group, which can provide in-
ternational expertise and financial resources.

The recommendations in this section represent Phase 1 of a strategy to promote CSR and SRI
in Peru. They are focused on improving the coordination among stakeholders for CSR and for
investment and economic development, and on increasing the capacity of the stakeholders to
understand the concept of market-based CSR that supports socially responsible investing.
When this is achieved, a guidance supplement to the Principios de Buen Gobierno Corporativa
can be prepared that will help Peru companies improve both their governance and their CSR.

In Phase 2 we present recommendations for actions by specific groups who can use this new
understanding.
 82

Phase 2: Sector Strategies for Promoting Market-Based CSR and SRI in Peru

Bank Management of Social and Environmental Risks in Credit

In Peru as in almost every country, much more investment is managed through banks than
through investment funds. Some banks in Peru are increasingly concerned about CSR both for
their own operations and for management of credit risks. Social and environmental issues can
significantly affect the risks of many types of credit in Peru. For example a banker may evaluate
an exporting company whose customers are demanding CSR performance, or an infrastructure
project that will have environmental and social impacts. In the example of Project Camisea, the
largest development project in Peru in 2004, the Inter-American Development Bank (BID), im-
posed extensive conditions for CSR management in its loan financing.

It should be expected that most large loans in Peru will impose increasing requirements for CSR
analysis, especially where the loans are syndicated with international partners. The interna-
tional banks that have endorsed the Equator Principles will apply them as conditions for financ-
ing projects in Peru that fall in certain high-risk categories. Even fully domestic loans can have
significant CSR risk. For example, a construction loan for an eco-hotel near a protected area is
very dependent on CSR performance. If CSR controversies emerge and tourists stay away,
how will the hotel owners pay back their loan? CSR management is applicable to many of the
domestic loans made by Peru banks.

The Asociacion de Bancos del Peru (ASBANC) represents the banking industry in Peru. It has
a training institute and promotes best practices in banking. ASBANC is the organization in Peru
that appears most capable for promoting CSR in banking practice and lending.

Chapter 2 discusses the international trends for CSR in banking, including both the internal op-
erations of banks and the evaluation of social and environmental risks in loans. It describes
technical guidance documents that can be used by banks anywhere, including in Peru.

It was not our intention to investigate CSR management in banks in Peru, but instead to de-
scribe how our research on market-based CSR criteria can be used in Peru, including by banks.
Banks in Peru can use the CSR model in this paper as a checklist for social and environmental
risk assessment in credit proposals. They can also use it to encourage CSR development by
their clients. In fact banks in Peru could be a significant source for promoting CSR, if they con-
clude that CSR protects market value for the clients. An advantage of our model is that banks
can refer their clients to the national quality program for technical assistance and training in how
to use the model. This is likely to help the clients and ultimately reduce risk to their banks.

However, our model is probably not as helpful for risk management as the technical guides for
CSR risk evaluation described in Chapter 2. It should be emphasized that these were devel-
oped by banks, for banks. They are very detailed and appear to be applicable to Peru. They
are also quite new, most of them were produced in only the last two years.

Environmental management in banks in Latin America has been studied extensively by INCAE,
the graduate business school in Costa Rica. With funding from donors, INCAE has created the
EcoBanking program. Its mission is to “improve the competitiveness of the Latin American Fi-
 83

nancial Sector through improved environmental management, reduction of environmental risks

and the design of innovative financial products.” It conducts research on environmental (and
some social) risk management in banks in Latin America and it produces an on-line guide to
Eco-Efficiency in Banking, including evaluation of environmental risks in credit. 126

Professor Lawrence Pratt of INCAE conducted a survey in 2002 of environmental management

in banks in Latin America and found that it is implemented at a much lower level than in banks
in developed countries.127 In Socially Responsible Investment in Latin America: Trends and
Potential Strategies, Pratt suggests that despite the low level at present of environmental man-
agement, banks in Latin America will be the driving force for SRI in the region.128

Banks in Latin America are receiving international support for CSR, particularly in the area of
environmental management. In 1999 the United Nations Environmental Programme Finance
Initiative (UNEPFI) held a regional conference on sustainable finance in Santiago, Chile that
drew hundreds of banks from the region (no Peru banks participated).129 In 2003 the UNEPFI
established a Latin American Taskforce (LATF). As of March 2004, the participating banks and
institutions include

• Corporacion Andina de Fomento (CAF) (acting Chair)

• ABN AMRO Asset Management/ Banco Real ABN AMRO
• ABN AMRO NV - Sucursal Argentina
• Banco do Brasil
• Banco Solidario
• BBVA Group
• Escola de Administragco de Empresas de Sco Paulo da Fundagco Getulio
• Vargas, Centro de Estudos em Sustentabilidade (CES)
• INCAE / Centro Latinoamericano para la Competitividad y Desarrollo Sostenible
• Santander Group
• UNIBANCO - Unico de Bancos Brasileiros S.A.

There are 14 individuals with varying backgrounds, such as asset management, environmental
compliance, project finance and micro-finance contributing to the taskforce. Membership of a
number of other institutions is being considered. The taskforce has developed a draft work pro-
gram for 2004, and while continuing member recruitment across the continent, is beginning to
plan activities and events for the second half of 2004. Currently underway is the development of
a scoping paper to identify critical issues for the Latin American financial sector with regards to
sustainable finance. A draft of this paper will be discussed at the first face to face meeting of the
taskforce planned for July 2004.130 This UN project is a good opportunity for banks in Peru to
learn about best practices in environmental risk management.

126
http://www.ecobanking.org
127
Pratt 2001. Programas ambientales en bancos latinoamericanos: Una Evaluación. INCAE,
Costa Rica.
128
Pratt 2003. Socially Responsible Investment in Latin America: Trends and Potential Strate-
gies. INCAE, San Juan, Costa Rica. http://www.ecobanking.org
129
Proceedings available at http://www.unepfi.net
130
Personal communication, April 15, 2004 from Mareike Hussels, United Nations Environ-
mental Programme Finance Initiative, Geneva. mareike.hussels@unep.ch,
http://www.unepfi.net/latf
 84

Another multilateral institution providing CSR support to banks is the IFC. IFC has been provid-
ing training to banks on the management of social and environmental risks for many years, in-
cluding in Latin America (but not yet in Peru). IFC also has a new Sustainable Financial Mar-
kets Facility that provides technical assistance to developing countries. It has a major focus on
the management of social and environmental risks in bank loans.131 As part of this investigation
we met with staff of the IFC in Washington DC to learn about their programs in CSR for bankers
and investors. We later met with the Asociacion de Banceros del Peru (ASBANC) to describe
the IFC program, and we drafted a letter that ASBANC sent to IFC expressing interest in coop-
eration. As a result, the IFC and ASBANC are now in discussion about a joint training program
for banks in Peru on the subject of CSR, SRI and credit risk and expect to start this program in
the middle of 2004. 132

Recommendation 9: ASBANC should obtain the technical guidelines for CSR evaluation by
banks described in Chapter 2 of this report. It should prepare a report
that includes short descriptions in Spanish about each resource and
distribute this report to the member banks. This should be sent to the
director of risk management in each bank.

Recommendation 10: ASBANC should create a working group of representatives from its
member banks to investigate how these new resources on CSR for
banking can be used. It is not enough just to provide documents; the
recipients must be encouraged to understand and use them. This
working group could suggest training programs, awareness events or
other activities to help Peru banks learn about the best practices in
CSR and banking. The group should also nominate representatives
from the banking sector in Peru to participate in the UNEPFI program
for financial institutions in Latin America.

Recommendation 11: ASBANC should apply to the IFC Sustainable Financial Markets Facil-
ity for grant funding to conduct a national program on CSR in banking.
This program should cover the following topics:

• The international network and trends for CSR in banking

• The technical guidelines for risk assessment and internal opera-
tions that are currently available
• How to establish a CSR program in a bank that improves internal
performance management and reduces credit risks.
• How to promote the CSR resources in Peru to bank customers.
This could be facilitated by a guide to CSR resources – see Rec-
ommendation 2.

131
www.ifc.org/sustainability
132
Personal communication, Alberto Morisaki, ASBANC, May 3, 2004.
 85

Foreign Direct Investment

Foreign Direct Investment (FDI) is by far the largest kind of international investment in Peru.
Schatz describes FDI statistics, policies and issues in the Andean region, including Peru,
through 1999.133 UNCTAD conducted a national review of investment policy in Peru in 2000.134
Current statistics for Peru are provided by UNECLAC 2002 135 and UNCTAD 136. The perspec-
tives of foreign investors about Peru, and more current statistics, are provided by Proinversion,
the state agency for FDI promotion in Peru.137 An important observation is that the financial
sector, and banks in particular, receives the largest proportion of FDI in Latin America and in
Peru. The information in the previous section about banks and CSR is directly relevant to pro-
moting FDI in the financial sector, including in Peru.

In Chapter 2 we described major issues for CSR in FDI. Increasingly, FDI is concerned about
CSR in national business partners, and foreign direct investors are becoming socially responsi-
ble investors. According to Proinversion, foreign investors and buyers are increasingly asking
questions about CSR from the companies in Peru that they are considering as investments or
suppliers. A number of companies in Peru have obtained certification to various international
standards for CSR, such as ISO 14001 and SA 8000. Most of these are subsidiaries of multina-
tional companies which already have advanced CSR policies or Peru companies with significant
export business. Tong and Mongret have studied the impact of ISO 14001 certification on com-
panies in Peru and conclude that it has had positive benefits on their financial as well as envi-
ronmental performance. 138

As Chapter 2 shows, foreign direct investors are no longer very impressed by the fact that com-
panies in developing countries simply subscribe to codes of conduct for responsibility. They are
conducting detailed evaluations of company management and performance in CSR. In coun-
tries like Peru this raises significant concerns for attracting FDI.

ProInversion is the leading agency in Peru for the promotion of FDI. It markets investments op-
portunities and facilitates transactions. Interviews with Proinversion show that CSR is a real
concern, but there is a lack of information about CSR resources and how to promote CSR in
Peru companies that will make a real difference to foreign investors.

The model for market-based CSR we present in Chapter 3 is directly useful for companies in
Peru that want to attract FDI. In Figure 14 we present a Survey and Self—Assessment Tool for
Corporate Social Responsibility and Socially Responsible Investing. This uses the core criteria
for SRI as the basis for evaluating a company’s capacity to talk about its CSR with potential in-
vestors. Some of the criteria may not be relevant to companies of different types, but most of

133
Shatz 2000. Expanding Foreign Direct Investment in the Andean Countries. H. Shatz Cen-
ter for International Development, Harvard University.
134
UNCTAD 2000. Investment Policy Review: Peru. United Nations Economic Commission for
Latin America and the Caribbean, Santiago.
135
UNECLAC 2002. Foreign investment in Latin America and the Caribbean, 2002. United Na-
tions Economic Commission for Latin America and the Caribbean, Santiago.
136
UNCTAD 2003 FDI Policies for Development: National and International Perspectives.
United Nations Conference on Trade and Development. New York.
137
http://www.proinversion.gob.pe
138
J. Tong and S. Mongrut. Working paper, in development. Universidad de Pacifico, Lima.
 86

the criteria are relevant, especially for companies in sectors with relatively significant social and
environmental issues such as mining, forestry, agriculture and manufacturing. Proinversion and
other agencies in Peru whose mission is to attract FDI should adapt the model as a means to
promote more CSR development in Peru companies.

Recommendation 11:
Proinversion should appoint a person on its staff to be the point of
contact and expert on CSR and SRI issues. This person should
participate actively in the CSR networks and activities in Peru. He
or she should create a reference library of CSR publications and
encourage the use of this library by Proinversion clients.

Recommendation 12: Proinversion should develop a version of the CSR assessment

tool in Figure 14 to help Peru companies determine how ready
they are to talk to socially responsible investors about their CSR
performance. Unlike any other CSR assessment tool currently
available, this tool uses the criteria for CSR that are used now by
socially responsible investors. Proinversion should have a policy
that every company which they actively promote is required to
complete this assessment.

Recommendation 13: Proinversion should provide a guide to CSR resources in Peru to

companies it promotes. It should ensure that directors of those
companies read and understand this guide, and encourage them
to contact the resources and obtain help to improve their CSR.
Proinversion should also provide this guide to foreign investors in-
terested in Peru, so they can use it with their existing or potential
Peruvian partners to develop CSR capacity.

The Bolsa de Valores de Lima

The Bolsa de Valores of Lima (BVL) is the national stock exchange of Peru. Aguilar provides a
description of the regulation, structure and market through 1998. 139 Current information is avail-
able from the website of the BVL. Note to Reviewer: A few more details and references de-
scribing the Bolsa will be inserted here.

The directors of the BVL actively promote international participation in the stock market and en-
courage foreign investors to buy stock in the listed companies. As noted in the section on cor-
porate governance, the BVL promotes the Buenas Principios de Gobierno Corporative to its
members and, as of May 2004, 12 listed companies have officially adopted the Principios. This
is a significant step for the promotion of CSR by the BVL.

In Chapter 2 we noted that the vast majority of stock market investment in emerging economies
from foreign investors is conducted by mutual funds, and that an increasing number of mutual

139
Aguilar 1998. El Mercado de Capitales en Perú Después de la Reforma Económica.
INCAE, Costa Rica.
 87

funds are using principles of socially responsible investment. The IFC recently found that there
is significant interest among SRI fund managers in emerging market opportunities, but there
remain many obstacles that need to be overcome. Besides the “normal” challenges of investing
in emerging markets, SRI fund managers face the challenge of evaluating CSR performance of
companies in emerging markets.

While the majority of emerging market fund investors do not use SRI principles now, it is ex-
pected that this will become much more common in the future. The BVL could improve the at-
tractiveness of Peru stocks to these investors by the listed companies in the BVL to both im-
prove and communicate their CSR performance to investors. This means promoting CSR de-
signed around the criteria that SRI fund managers think are important. In Chapter 3 we identi-
fied those criteria. In Chapter 1 we described the emerging global standard for sustainability
reporting produced by the Global Reporting Initiative (GRI). The BVL could use our model of
market-based CSR criteria to educate listed companies about how to design their CSR systems.
It could educate companies about the GRI reporting standard to show them how to communi-
cate CSR to investors.

Socially responsible investment in the Peru stock market is not likely to be very significant. The
Peru market itself is too small and there are not enough companies which meet international
investor requirements for liquidity and risk. But attracting more buyers to the BVL stocks is not
our point. CSR, including good governance, is a good business practice for all the companies
on the BVL. But most of them do not know that CSR is an increasing concern to market inves-
tors. The BVL is in a unique position to promote CSR in Peru by showing listed companies how
investors are using CSR criteria.

Recommendation 14:
The BVL should conduct programs for listed companies to in-
crease their awareness about SRI and the criteria used by SRI
fund managers to select stocks for their funds. The appropriate
audience for this is the investor relations managers of listed com-
panies.

Recommendation 15:
The BVL should adapt the CSR assessment tool in Figure 14 for
use by listed companies. Because Corporate Governance is par-
ticularly important for the listed companies, the tool should have
increased emphasis on governance and CSR. The BVL should
distribute this tool to all the listed companies and encourage them
to use it for self-assessment of their capacity to talk with potential
investors about their CSR performance.

Private Sector Mutual Funds

There are 23 private sector mutual funds operating in Peru as of May 2004. They are listed in
Table 14. The total amount invested in mutual funds is about 7.2 billion soles or about 2 billion
US dollars. There are about 67,000 investors in the funds. 140

140
Commission Nacional Supervisora de Empresas y Valores
 88

Table 14: Private Mutual Funds in Peru

RESUMEN GENERAL - FONDOS

MUTUOS
TIPO DE FONDO MONEDA INSTITUCIÓN

Renta Mixta
CREDIFONDO BALANCEADO FMIV $ Banco de Crédito
INTERFONDO MIXTO FMIV $ Interbank
PROMOINVEST FONDO SELECTIVO $ Promoinvest Sociedad Administradora de
Fondos S.A.A
SUPER RENTA LARGO PLAZO S/. Banco Continental
Renta Soles
INTERFONDO SOLES FMIV S/. Interbank
SUPER RENTA SOLES S/. Banco Continental
Renta Dólares
CREDIFONDO RF - $ $ Banco de Credito
FONDO RENTA PREMIUM $ Banco Wiese
FONDO RENTA SELECT $ Banco Wiese
INTERFONDO PLUS FMIV $ Interbank
INTERFONDO RF FMIV $ Interbank
PROGRESO RENTA USD - FMIV $ Grupo Coril Sociedad Administradora de
Fondos S.A.
PROMOINVEST RF-DOLARES FMIV $ Promoinvest Sociedad Administradora de
Fondos S.A.A
SUPER RENTA DOLARES $ Banco Continental
SUPER RENTA VIP FMIV $ Banco Continental

Corto Plazo Soles

CREDIFONDO CP S/ FMIV S/. Banco de Credito
FONDO RENTA CASH S/. FMIV S/. Banco Wiese

Corto Plazo Dólares

CREDIFONDO CP $ FMIV $ Banco de Credito
FONDO RENTA CASH $ FMIV $ Banco Wiese
INTERFONDO CASH FMIV $ Interbank
SUPER RENTA DOLARES $ Banco Continental
MONETARIO

As part of our investigation we interviewed the investment managers of the funds that invest in
stocks in Peru. We used the CSR assessment tool in Figure 14. We asked the managers to
what extent, if any, did they consider the CSR criteria in their investments. We found that none
of them have any formal procedures for evaluating CSR in investment. We also found very little
awareness of responsible investing in other countries, and little awareness of CSR activities and
resources in Peru.
 89

However, SRI could become more relevant to mutual fund investment in Peru. Surveys of in-
vestors in other countries show strong interest in SRI and concern about corporate behavior and
governance, and significant numbers of investors indicate they probably will use SRI funds in
the future if they do not do so already.

This trend should apply in Peru. Awareness in Peru about CSR is increasing, slowly but stead-
ily. More companies are practicing CSR and reporting about their performance. More invest-
ment professionals are convinced that CSR is good business practice that can reduce risk and
increase profits. Competition among funds for the relatively small pool of investors is strong,
and the use of responsibility messages in marketing of funds could make a difference in attract-
ing customers. Finally, funds in developed countries are starting branch operations in emerging
economies, and they are likely to apply the investment principles of their parent companies. As
the IFC review of SRI in emerging markets shows, a number of SRI mutual fund companies
have already started funds in emerging markets.

Perhaps a simple test of the potential for SRI in mutual funds in Peru is to ask a question to ex-
isting fund investors: “Would you be more likely to invest in a fund that uses principles of social
responsibility in its investments, if it did not cost you any more to do so?” It is the last part of
this question that makes a difference. Investors are concerned first about their profits. Even in
developed countries the vast majority of investors will not use SRI funds if they expect to make
lower profits. But if they expect the SRI funds will be competitive with unscreened funds, then
being “responsible” as well as profitable seems like a good idea.

To promote SRI in mutual funds in Peru we suggest that a survey of investors be conducted to
learn the answer to the question above. Random sampling could produce a clear answer. If a
significant majority indicate that they would choose a responsible fund, then we should expect
that fund companies in Peru will produce a product to satisfy them.

If a SRI mutual fund was created in Peru, how would it work? For guidance we can turn to re-
cent studies of the best practices in SRI research. In 2001 the Norway government commis-
sioned a study of the practices used by SRI research companies. Its objective was to identify
the best practices in SRI research for fund managers. Table 15 summarizes the findings of the
study.

Table 15: Best Practices for CSR Evaluation by Mutual Fund Managers 141

Triple-bottom-line-approach
Focus should be on sustainable development, which means that environmental, social and
economic performance should be evaluated.

Focus on best-in-class, and pioneers/innovators

A combination of investments in companies which represent best-in-class in the ‘blue chip’
business sector, and investments in companies representing pioneers/innovators offers both

141
MISTRA 2002
 90

business and sustainability opportunities.

Evaluating sustainability opportunities and sustainability risks

A screening process aimed at identifying best-in-class companies regarding environmental
and social performance should, to a large extent, focus on sustainability opportunities.

‘Intelligent’ screening model (combination of qualitative and quantitative analysis)

Environmental performance can to some extent be quantifi ed, but should not be limited to
compliance testing. The quantitative evaluation also include risks of being too standardized,
not suiting all business sectors. A qualitative dimension is necessary in order to identify
best-in-class companies.

Qualified research team

Qualified assessments cannot be made without a qualified SRI research team, and it is of-
ten difficult to have all resources in-house, covering all business sectors – and different geo-
graphical markets. Leading practitioners are therefore utilising detailed in-house research,
but supplemented by basic research undertaken by specialist research groups.

Openness/transparency
In order to gain credibility, and also to influence others, openness and transparency about
screening procedures and results are vital. Both in relation to companies screened, as well
as relationships with customers and other stake-holders.

In 2003 this study was updated because of the fast growth of the SRI market and the entrance
of new SRI market research firms.142 The new study found that there is great variation in the
practices used for SRI research and the evaluation of CSR and that specialised SRI research
firms are facing many challenges as more funds start including CSR in their own research.
However, the study confirmed the general conclusions in Table 15. This should be a guide to
mutual funds managers about how to design and implement an SRI fund or funds in Peru.

One comment that been made often in our discussions is that there are just not enough compa-
nies in the Peru BVL to make SRI applicable. According to one investment leader, “we have to
buy everything” because there are not enough options. If SRI means that a company is rejected
then SRI may not work in Peru. However, this concern is based on a misunderstanding of the
principles of SRI. SRI is about evaluating investment risk, using additional criteria. If additional
analysis reveals that a potential investment has serious risks and is likely to lose money, then it
should not be in the portfolio. The question is one of balance. SRI research can help fund
managers shift the balance of their portfolios around to reflect the new risks and opportunities
that they identify with more intensive analysis.

Mutual fund managers in Peru will become interested in SRI when a) they are convinced that
SRI does not cost more or have lower returns, and b) there is demand in the market for SRI op-
tions. The evidence in Chapter 1 should be convincing that SRI does not cost more, and can
even increase returns. However we have no evidence that there is demand in Peru for SRI.
This should be a priority for research, because if enough investors say they will move their mo-
ney to an SRI fund, someone will create it. It should always be remembered that mutual funds

142
SAM 2004. Values for Money: Reviewing the Quality of SRI Research. SustainAbility Ltd.,
London. www.sustainability.com
 91

funds earn their profits from fees based on assets under management. If they can attract a lot
of investors they make more money, even if they cannot prove long-term performance will be
better.

Recommendation 16: A study should be conducted of mutual fund investors in Peru to

determine if they would invest in a mutual fund that uses SRI prin-
ciples. The results should be promoted to mutual fund managers
in Peru.

Recommendation 17: The Commission Nacional Supervisora de Empresas y Valores

that regulates mutual funds should conduct seminars for fund
managers to raise their awareness about SRI strategies and per-
formance. The CONASEV should invite directors of specialized
SRI research funds from other countries to participate and share
their knowledge. They will be likely to agree because they could
find new customers among Peru investment managers for their
research skills.

Recommendation 18: To stimulate mutual fund interest in CSR in Peru, an evaluation

should be done of the CSR performance of the “blue chip” com-
panies listed on the BVL using the assessment tool we producted
and which is shown in Figure 14. The results should be publicized
widely in Peru and in the SRI information networks.

Recommendation 19: Mutual funds in Peru that are considering how to include CSR in
their evaluation of stocks for investment should follow the best
practices shown in Table 15.

In this chapter we are presenting a linear strategy for promoting SRI and CSR in Peru. Phase 1
focused on building awareness and understanding. Phase 2 explained how SRI and CSR are
relevant to key stakeholders in Peru and how they can take action. In Phase 3 we present a
strategy for integrating SRI into the national pension system of Peru.
 92

Phase 3: Socially Responsible Investment in the National Pension System

In Chapter 2 we showed that SRI is now becoming a standard for best practice in the manage-
ment and regulation of pension funds. A number of European countries and North American
states and provinces have made SRI an official part of pension fund investment regulations.
Even where it is not required an increasing number of pension funds are using SRI because
they believe it is good investment practice – it is “prudent” – and because it supports their mis-
sion to provide a better future for their members.

This is having a tremendous effect on SRI and the promotion of CSR around the world because
pension funds are the biggest investment funds of all. More and more they are using their influ-
ence and control to demand better CSR performance from the companies in which they invest.
They are also becoming major investors in SRI mutual funds; in fact some pension funds are
actually buying SRI research firms to build their own capacities in SRI. SRI is a powerful trend
in pension fund policy and management.

The third phase of the strategy to promote SRI and CSR in Peru is to follow this trend and en-
courage SRI in the pension funds of Peru. We believe this will improve the investment returns
of the AFPs, satisfy the desires of AFP members, and encourage the development of CSR in
Peru.

Overview of the SPP

The pension system of Peru was privatized following the Chile model in 1994. In the Sistema
Privada de Pensiones (SPP), four Administradores de Fondos de Pensiones (AFPs) now com-
pete to administer the pension funds of salaried workers in the private sector, who can choose
freely among the AFPs. Government workers are covered by the Sistema Nacional de Pen-
siones (SNP).

The AFPs together are the largest group of private investors in Peru, they hold about 10% of the
value of the Bolsa de Valores de Lima. They are subject to extensive regulation by the Superin-
tendente de Bancos y Seguros (SBS), including regulation of investments in corporate stocks
and bonds. Figure 16 shows the distribution of investments by the AFPs.

Moron and Carranza have published a comprehensive and current academic study of the SPP
in Peru. 143 It includes detailed history, statistics, analysis and recommendations. Readers are
referred to this excellent book for more information. Another current academic study is provided
by Panizo and Vallenas. 144 The Asociacion de AFPS (AAFP) has also published a review in a
more popular style 145 and its website includes news and articles about the SPP. Ortega 146 of-
fers commentary about lessons learned from 10 years of the AFPs. The pension system in

143
Morón 2003. Diez años del Sistema Privado de Pensiones (1993-2003): Avances, Retos y
Reformas. E. Morón and E. Carranza. Universidad del Pacifico, Lima.
144
Panizo and Vallenas 2003. Análisis del Sistema Privado de Pensiones desde un Enfoque de
Costos Hundidos Endógenos. Jorge Paz P and R. Ugaz V. Consorcio de Investigación Eco-
nómica y Social. Lima.
145
AAFP 2003. Construyendo el Futuro: 10 Anos de Logros del Sistema Privado de Pensio-
nes. Asociacion de AFPS de Peru, Lima.
146
Ortega 2003. Una década del Sistema Privado de Pensiones: ¿Qué hemos aprendido? E.
Ortega, Centro de Estudios del Mercado de Capitales y Financiero, Lima.
 93

Peru is included in a number of reviews of pension policy and management in Latin America
produced by international agencies such as the IADB. 147

Figure 14: Distribution of Investments of the AFPs in Peru 148

Investments in stocks is the biggest portion of the AFP portfolios. The rules for investment re-
quire that they can only buy stocks with the best risk ratings, often called “blue chip” stocks.
There are only about 12 of these stocks on the BVL, and the AFPs collectively buy stock in all of
them. The AFPs are the largest Peruvian market investors in the blue chip stocks in Lima.

The SPP faces many tremendous challenges, the biggest being that the system does not earn
enough money to pay for all the members who will need pensions in the future. A number of
recommendations have been made in response. The most common and important is liberaliz-
ing the rules of investment for the AFPs, including allowing more investment outside the coun-
try. Moron and Carranza demonstrate that an increase of 1% in investment return would be
much more effective than other proposed remedies such as reducing the commissions charged
by the AFPs. Almost all reviewers of pension systems in emerging economies have recom-
mended that investment restrictions should be liberalized, and in particular that more investment
in stocks and in international markets should be allowed.

New Policy Developments in the SPP

It is in this context of investment policy that Socially Responsible Investment has application in
Peru. Several recent developments in policy for the SPPs are creating opportunities for SRI.

147
IADB 2001. Pension Reform in Small Emerging Economies: Issues and Challenges. Inter-
American Development Bank, Washington, D.C.
148
Fuente: SBS, Febrero 2004
 94

The SBS is now developing a major innovation in the AFP investment system. The Multifondos
scheme will allow each AFP to offer three levels of investment risk to their members: Preser-
vación de Capital, Mixto and Apreciacion de Capital. AFP members will be given the option to
select one of the three fund options, and it is expected that they will correlate with the age
groups. The Apreciacion fund will be marketed to young people, the preservacion fund to older
people, in accordance with their ability to tolerate risk.

Figure 15: Investment Structure in the Multifondo System 149

However, there are not enough financial instruments in the Peru market to provide the flexibility
and options needed to support the Multifondo system. So the SBS is also liberalizing the rules
for international investment by the AFPs. They will be able to increase their international in-
vestment. If they follow the pattern of other pension funds around the world, for capital appre-
ciation they will probably choose mutual funds.

Another policy development is in corporate governance. The SBS is developing rules for gov-
ernance for the AFPs. One of the rules will be that the AFPs can appoint a director to the board
of directors in companies in Peru in which they make significant investments. 150

Potential Applications of SRI by the AFPs

Multifondos and International Investment

In Chapter 1 we showed the academic and market evidence for the performance of SRI funds.
In general, the consideration of social and environmental risks and CSR reduces risk in invest-

149
Moreyra 2004. Sistema Multifondos. Pablo Moreyra Almenara, AFP Horizonte, Lima
150
Personal Communication, Lorena Masieas, Superintendente de AFPs, May 2004.
 95

ments, it does not reduce returns in comparison to market benchmarks, and it can deliver
above-average performance. As investment managers, the AFPs should certainly become
aware of the evidence and practice in SRI.

In particular the new Multifondo system will increase the need for better evaluation of stocks. At
this time, the AFPs have to buy all the blue chips stocks that are available on the BVL in order
to maximize their option for equity investment; they really have no choice. So it is unlikely that
they use the same level of investment analysis for stocks as professional fund managers in de-
veloped countries. But in the future the AFPs will have to evaluate many more stocks, including
ones in other countries. They will have to significantly improve their evaluation of investment
options. In particular, the Apreciacion funds will be heavily weighted to stocks. The use of SRI
principles and CSR criteria to pick stocks for that portfolio is likely to improve its performance.

The requirement that the AFPs invest only in “blue chip” stocks is not likely to change, nor would
it be necessary if they have the international markets to consider. But finding blue chip compa-
nies with good CSR performance is easy; they are listed in the various SRI market indexes. For
example, the AFPs can look to the Dow Jones Sustainability Index (DJSI) for companies in
which to buy stock. The Dow Jones has already done the CSR evaluation, and all the compa-
nies on the DJSI are from the Dow Jones Global Index of blue chip stocks around the world.
The AFPs could invest individual stocks from the DJSI, or it could buy shares in mutual funds
based on the Index. The latter approach would provide more diversification, which is important
for reducing market risk. DJSI is not the only option, there are many other SRI funds with
above-average market performance. In summary, as the AFPs increase their international in-
vestment in stocks, the SRI funds and indexes offer many opportunities for both profits and re-
sponsibility.

Investment in Peru Stocks

As noted above, there are only a handful of stocks on the Peru BVL in which the AFPs can in-
vest. This is not likely to change, since increasing the pool of available stocks means increasing
the risk. Divestment from the Peru stocks is not an option, according to AFP directors.

But SRI and CSR are still relevant in this area. First, SRI can reveal real risks that are not dis-
covered by traditional financial analysis. An important example is the work by Repetto et al. 151
They investigated the potential financial risks from environmental issues to eight major public
companies in the pulp and paper sector in the USA. They concluded that, within this sector, the
market value of the companies could be and probably would be negatively affected as much as
15% by environmental issues. They also show that these risks are not addressed in the finan-
cial reports of the companies.

This study is quite relevant to the AFPs because they face a similar type of sector exposure. Of
the 12 companies on the BVL where they can invest, 4 are large mining companies. And most
of the AFPs invest in all of them.152 They all have significant issues for social and environmental
management. Obviously the social and environmental risks faced by these four companies are
not identical, and it is certainly possible that these risks could affect their financial performance.
In the worst scenario, a social or environmental disaster could even cause one of the compa-

151
WRI 2002. Pure Profit: The Financial Implications of Environmental Performance. R.
Repetto et al, World Resources Institute, Washington DC.
152
The AFPs show the companies in which they invest on their websites.
 96

nies to close its operations, leading to significant losses for the AFPs. Repetto et al describe
their method for comparing financial exposure to environmental risk within a sector. The AFPs
can use this method to evaluate CSR risks for the companies on the BVL where they invest.

What if an AFP discovers that one of the companies does have significant potential risks? SRI
does not require divesting from companies that have low CSR performance. Instead of divest-
ing, investors can actively engage the companies to improve their CSR performance. If this im-
provement is focused on internal management processes, there is a good chance that overall
business value will increase along with CSR performance. The plan of the SBS that the AFPs
can appoint a director to the Peru companies in which they invest is an excellent opportunity to
engage the companies on improvement of CSR performance.

Conformance with Best Practices in Pension Fund Investment

The use of SRI for investment would bring the AFPs of Peru into closer conformance with the
best practices in pension fund investment around the world. As we show in Chapter 2, some of
the world’s largest pension funds now have SRI policies – in the UK over 50% of pension funds
have developed SRI policies. Governments in several European countries now require that
pension funds disclose their SRI policies (if any). Several guidelines about “Pensions and SRI”
have recently been published for fund trustees and legislators. International guidelines for cor-
porate governance published by pension funds specifically include CSR.

SRI, with a particular focus on corporate governance, is becoming a “best practice” for pension
funds. As a general principle, the AFPs of Peru should follow best practices for pension funds.
They can study what the leading pension funds in other countries are doing for SRI and use
their results to develop their own policies and practices for SRI.

Competition for Customers

The AFPs compete for new members. The members make their decisions about which AFP will
manage their investments partly on the marketing materials from the AFPs. Chapter 1 shows
that many investors in developed countries are concerned about CSR and that they will choose
financial advisors and investment options based partly on SRI principles. There is no reason to
think this is different in Peru.

The use of SRI could be a factor for competitive advantage in marketing for the AFPs. Since
the returns from the AFPs are guaranteed, that is not a factor for choosing one AFP over an-
other. But when people think about their pension funds, they think about their future. SRI fits
with vision of “a better tomorrow” which is important for most people. SRI could be a factor that
helps an AFP win a new customer. The easiest way to understand this is to compare the mar-
keting materials of the AFPs. None of them discuss SRI at this time. But if one of them in-
cluded information about its SRI policies and practices, it would stand out. If it is the only one
that talks about SRI, and all the other marketing factors are relatively equal, then SRI could be
win the new customer.

As we noted earlier in the discussion of mutual funds in Peru, there is no information now about
the interest of investors in Peru about CSR and SRI. We recommend that a survey of this be
done, and soon, as an important step to discover the relevance of SRI to competition among the
AFPs in Peru.

Potential Impact of SRI by the AFPs.

 97

What might happen in Peru if the AFPs starting using SRI principles?

The AFPs now invest in a small number of companies on the BVL. The first step in SRI by
AFPs would be to develop a survey of CSR by these companies. The impact on the companies
would depend on the nature of the surveys. If they are general in nature or just ask them to de-
scribe their programs, the impact on the companies will be small. They probably will hand the
task of responding to the survey to someone in their public relations department. However, if
the AFPs use the highly detailed CSR evaluation guidelines that are now available, it is likely
that the companies will have to answer that they have no practices in a number of CSR areas.
In this case, the companies may feel pressure to respond by improving their CSR performance
in those areas. No company likes to tell its investors that it is doing nothing about something
the investor cares about.

One option for the AFPs is to ask the companies in which they invest to report on CSR using the
Sustainability Reporting Guidelines of the Global Reporting Initiative, which are described in
Chapter 1. These guidelines are becoming the international standard for CSR and sustainability
reporting. They are very detailed, and there is significant guidance available for using them. If
the companies in which the AFPs are asked to comply with the GRI reporting guidelines, and if
they agree, this would greatly advance the practice of CSR in Peru because the focus of the
GRI guidelines is on internal management, not on social support programs which seem to be
the main focus of CSR in Peru.

In Chapter 3 we showed that SRI funds and indexes often include CSR practices for managing
suppliers. Responsible companies are expected to promote responsibility to their suppliers, and
to help them develop their own CSR programs. This is a major trend around the world in CSR
and there are many guidelines for companies about how to help their suppliers.153

The companies in which the AFPs invest include mining and construction companies, both of
which have significant supply chains in manufacturing and which, like other companies in these
sectors, have relatively significant social and environmental issues to manage. The companies
in these supply chains could benefit from the guidance available about managing CSR in their
operations. If the AFPs asked companies specifically about their practices for managing CSR in
their supply chains, this would encourage the companies to focus on this area. It is possible
they would begin promoting CSR to their suppliers, which would increase the spread of CSR in
Peru.

There is an excellent precedent for this expectation. The NGO Peru 2021 is conducting a pro-
ject on promotion of environmental management systems (EMS) to suppliers of its corporate
members. The Projecto Cadena has provided training in EMS using international and local con-
sultants and helped many companies move towards CSR and environmental performance.154
The project is still in process but it demonstrates that CSR can be spread in Peru through sup-
ply chains. If the AFPs encourage the companies in which they invest to follow this example, it
could have a good effect on CSR in Peru.

153
World Bank 2003. Strengthening Implementation of Corporate Social Responsibility in
Global Supply Chains. World Bank, Washington DC
154
http://www.peru2021.org/proyec1.htm
 98

Of course this is speculation. However, there are many clear examples around the world that
companies improve their CSR when their investors ask them to report on it. There is no reason
to think that companies in Peru would behave differently.

How Would the AFPs Develop Capacity for SRI?

In Chapter 2 we described the state of SRI in pension funds in developed countries and particu-
larly in Europe. Because of requirements in some countries that pension funds disclose their
SRI policies, there is now a great deal of information about how pensions are using SRI. In fact
some of them are even publishing best practice guides for other pensions. At the same time,
NGOs that promote SRI in pensions and SRI research firms are also publishing guides to best
practice in SRI for pensions. In summary, there is no shortage of published guidance for the
AFPs to begin with SRI.

The new model for market-based CSR presented in Chapter 3 could be very useful for the
AFPs. It includes the CSR criteria that SRI funds and indexes think have a good correlation
with reduced risk and increased profits. Figure 14 presents a checklist that the AFPs can dis-
tribute to the companies in which they invest. They can simply ask them to complete the form
and return it to them. If the results show that a company has little or nothing to say about one of
the items, this can be the basis for discussion with the company about the topic. It should also
encourage more interest in CSR within the company, because the checklist is based on profit-
able management practices that they may not have realized are important to investors.

The CSR model presented in this paper is based on the Baldrige quality standard. It should be
noted that one of the AFPs, AFP Profuturo, already uses the Baldrige system for performance
excellence. Profuturo was the winner of the South American Quality Award in 2002; we can ex-
pect that they will easily understand how to use the model.

Besides studying the guidance materials available there are various opportunities for the AFPs
to participate in international programs on asset management. The UNEPFI has a working
group on asset management for financial institutions and also a working group for Latin Amer-
ica.155 This is a good opportunity for the AFPs to participate in international networks for best
responsible practices in asset management.

How to Promote SRI in the AFPs

We would like to believe that the arguments above will be enough to convince one or all of the
AFPs to adopt SRI principles. But some encouragement through policy development would
help them move more quickly. In Chapter 2 we described how governments in some European
countries have produced legislation that requires pension funds to disclose their policies for SRI.

The most simple and potentially effective approach to promote SRI by the AFPs in Peru would
be to follow the example of the UK legislation for SRI in pensions. This simple amendment to
the pension law states that pension funds must disclose their SRI policies (if any). This obvi-
ously motivated many trustees to learn about SRI, and it appears that most funds do not like to

155
http://www.unepfi.net
 99

say that they have no policies at all about SRI. As a result, in the UK over 70% of pension
funds had developed SRI policies and practices by 2003.

The UK model would be appropriate for Peru because of the competition among the AFPs.
They compete directly for new clients, using various marketing strategies and information prod-
ucts. SRI would be a competitive factor in obtaining clients if the AFPs had to disclose their SRI
policies. There is little difference financially for prospective clients between the AFPs – the re-
turn and risk are regulated. The difference is customer perception. SRI has strong investor in-
terest in developed countries, and there is every reason to believe that investors including pen-
sion fund members will be interested in it as well. Good SRI policies and practices should at-
tract more clients for the AFPs. They can be encouraged to develop SRI, and expect to benefit
financially, if they are required to disclose their policies about SRI.

Recommendation 20: The Asociacion de AFPs (AAF) should organize an international

seminar with its members to increase their awareness about SRI
in pension fund management. It should invite representatives
from leading pension funds that already use SRI to explain what
they do and why. We suggest the USS fund in UK, which has pu-
blished a guide to responsible pension fund investment for use by
other funds and which rated as a leader in SRI by NGOs in the
UK. The British Embassy in Peru may be willing to provide travel
support.

Recommendation 21: The AFPs should send the survey tool in Figure 14 to the compa-
nies in which they invest and ask them to complete it. This should
be the basis for discussion about the companies’ ability to report
on CSR to their important investors.

Recommendation 22: The SBS should add the following statement (or something simi-
lar) to the rules for investment regulation by the AFPs 156:

”The AFPs shall make a public report to their members about their
policies and practices for evaluating the social, environmental and
ethical practices and risks of the companies in which they invest.”

Recommendation 23: The AFPs should join the UNEPFI Working Group for Latin Amer-
ica and participate in the development of best practices for CSR in
asset management.

156
TEXTO UNICO ORDENADO DE LA LEY DEL SISTEMA PRIVADO DE ADMINISTRACIÓN
DE FONDOS DE PENSIONES. TÍTULO III, CAPÍTULO III, Artículo 25º.- INSTRUMENTOS DE
INVERSIÓN DE LAS AFP
100
 101

Conclusión
Socially Responsible Investing is now a major force around the world for promoting Corporate
Social Responsibility. Academic and market evidence show that SRI has competitive perform-
ance with investing that does not consider CSR or sustainable development. SRI funds and
indexes have identified the specific CSR performance criteria that they believe have a positive
correlation with profitability. SRI motivates companies to be more responsible because it gives
companies a clear answer to the question, “Why should I try to be more socially responsible?”
The answer now is, “Because you can attract more investors and make more money.”

Our research identified the core criteria for CSR used in the SRI market. We clustered these
criteria using a quality management framework that promotes their implementation within com-
panies so they are integrated with the business processes that add value. We used our model
to develop a new tool for companies to evaluate their capacity or readiness to talk with investors
about their CSR performance. Any company can use this tool to learn if they would be ac-
cepted or rejected by investors or customers who are concerned about CSR.

We investigated the potential applications of our research in Peru. CSR in Peru has been fo-
cused primarily on business assistance to society. In contrast, SRI criteria are focused on de-
veloping internal business management capacities for CSR. We believe that CSR in Peru
should include this approach in its philosophy. Business support for society will be strength-
ened if the concepts for CSR are integrated more closely into the value functions of business.

There are several important potential customers for our research in Peru. They include im-
provement of the national award systems for quality and for CSR, Foreign Direct Investment,
the Bolsa de Valores, banks and the banking association, private mutual funds, and the national
pension system. There are more possible applications. The CSR community of companies,
NGOs and government agencies should learn more about SRI and market-based CSR. The
trends of SRI and emerging market invesment are converging, and Peru needs to be ready to
attract emerging market investment that is concerned about CSR.

This paper presents several opportunities for further research on CSR and the potential for SRI
in Peru. The assessment tool we developed could be distributed to companies to learn how
ready they are to respond to potential investors and customers who are concerned about CSR.
Such a study would increase the awareness in Peru that CSR is about internal management as
well as about helping society.

There are over 60,000 investors in private sector mutual funds offered by institutions in Peru. A
survey could be conducted to learn about their interest and concern for SRI. In other countries
individual investors have shown strong interest in investment that is both profitable and respon-
sible. If the survey in Peru revealed similar levels of interest, the mutual fund companies may
offer SRI products. This would further promote CSR in Peru.

The world of SRI and CSR is both relatively new and evolving very quickly. In the six months
during which this investigation was conducted, about 15 important reports or guidance manuals
have been published about the relationship between CSR and profitability, and the application
of SRI in various areas. We encourage the development in Peru of a reference center or work-
ing group that keeps track of these developments and helps distribute them in Peru. Almost all
 102

of the new studies and guides are available for free download from the Internet. With a few
moments of work they can be emailed around Peru to organizations that can benefit from them.
The evolution of SRI and CSR represents a wonderful new phenomenon in the world of busi-
ness: Sharing the best practices instead of keeping them secret for competitive advantage.
The leaders around the world in banking, investment, pensions, quality and management sys-
tems are giving their best information away for free because they want to promote sustainable
development. Who will step up to make sure this incredible opportunity for sustainable market
investment in Peru is realized?
 103

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 105

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 109

Appendix 2: Selected Bibliography for Corporate Social Re-

sponsibility in Peru

Ausejo, Flavio. 2000. "Más allá de la Empresa: Responsabilidad Social, empresas peruanas que
adoptan este concepto dentro de su planeamiento estratégico" en Gestión - Suplemento
Seminarium, Septiembre del 2000.

Caravedo, Baltazar. 1997. Empresa, Sociedad y Estado. Lima: SASE y Sociedad Nacional de
Exportadores.

Caravedo, Baltazar. 1998. Responsabilidad Social de la Empresa. Lima: SASE.

Caravedo, Baltazar. 1999. "Empresa y Desarrollo Nacional" en Gerencia, IPAE, Agosto, 1999.

Caravedo Baltazar. 2000. "Empresa y Responsabilidad Social" en Gerencia, IPAE, Enero del
2000.

Caravedo, Baltazar. 1999. "Estrategia de Responsabilidad Social (II)" en Minas y Petróleo, No.
171, L&L Editores. 28 de Octubre de 1999.

Caravedo, Baltazar. 1999. "Estrategia de Responsabilidad Social (II)" en Minas y Petróleo, No.
174, L&L Editores. 28 de Octubre de 1999.

Caravedo, Baltazar. 1999. Informativo Mensual, Sociedad Nacional de Minería, Petróleo y

Energía, Año VII, No. 12, Diciembre de 1999.

Caravedo, Baltazar. 1998. Perú: Empresas Responsables. Perú, 2021 ed., 1998.

Caravedo, Baltazar. 1998. “Plan Empresarial para el Desarrollo Nacional”. Desarrollo de Base,
Revista de la Fundación Interamericana, vol. 21, No.2. Arlington Virginia.

Caravedo, Baltazar. 1999. "Responsabilidad Social de las Empresas en el Perú" en Negocios In-
ternacionales, Agosto 1999.

Caravedo, Baltazar, "Special Report. Social Responsibility in Peru.” Monitor Monthly. Lima,
Vol.01, Num.1, January, 2000.

Confederación Nacional de Instituciones Empresariales Privadas del Perú (CONFIEP) y Organi-

zación Internacional del Trabajo (OIT). 1997. Manual de Balance Social. Lima, Perú.

Instituto Apoyo-SASE. 1996. “Nuevas Tendencias en la Contribución al Desarrollo Social”.

Empresa y ONGD. Lima.
 110

Madueño Ortiz, Violeta y Vera Tudela, Carlos. 1998. “Responsabilidad Social de la Empresa y
Balance Social”. Noticiero Económico, Cámara de Comercio Italiana del Perú. Num.6.
Lima.

Nelson, Jane. 1998. “Las empresas como socias en el desarrollo. Fortalecimiento de la contribu-
ción pública de la empresa privada”. Desarrollo de Base, Revista de la Fundación Inter-
americana. Vol. 21, No. 2. Arlington: Virginia.

Portocarrero Llusera, Sergio, Felipe, Sanborn, Cynthia, Quea, Viviana. 2000. Empresas, Funda-
ciones y Medios: La Responsabilidad Social En El Perú. 2000.

Sulmont, Denis and Vásquez, Enrique Eds. 2000. Modernización Empresarial en el Perú. Lima,
Perú: Red para el Desarrollo de las Ciencias Sociales en el Perú.

Villacorta, Juan Carlos. 2000. "La Responsabilidad Social en la Empresa" en Síntesis, Julio del
2000.

Villacorta, Juan Carlos. 2000. "Un Enfoque Práctico de la Responsabilidad Social" en Síntesis,
Agosto del 2000.
111