IFC Leads Sustainable Investing in Emerging Markets

Two recent announcements from IFC (the World Bank Group member dedicated to private sector development in emerging markets) demonstrate continuing leadership in emerging market sustainable investing.

The IFC's inaugural green bond, a $200 Million, four year, fixed rate issue scheduled to close on April 26, will reserve all proceeds for investment in climate friendly projects in developing markets. This is the first time IFC will dedicate bond funds to a specific pool of loans. The green feature makes the bonds attractive to a growing audience of institutions charged with finding socially and environmentally responsible investments. “The Green Bond is yet another example of how IFC is creating innovative financial products that offer both development impact and good return for investors”, said Nina Shapiro, IFC Vice President and Treasurer.

IFC has also published a brief on it's ongoing sustainable finance mission in preparation for the Spring Meetings – the annual review of the joint IMF-World Bank Development Committee and the IMF International Monetary and Financial Committee held April 24 and 25 in Washington, DC. The plan is not just to invest IFC funds wisely, but to build investment infrastructure in developing countries while using IFC's track record to encourage and enable sustainable investment by global capital markets in those developing countries.

Three IFC focal points seem particularly exciting for the sustainable investment community:

• IFC is developing the necessary market infrastructure to support the growth of sustainable investment by funding the development of enhanced stock market indices, market research, and training; and by sharing IFC’s substantial experience in incorporating environmental and social issues when investing in emerging markets.
• With assets of over $20 trillion and long-term investment time horizons, pension funds are a potentially important source of investment capital for the hundreds of millions needed to combat climate change. IFC is working with pension funds to develop new financial instruments to help tackle climate change.
• Private Equity is an increasingly important source of capital for growing businesses in emerging economies. IFC is supporting private equity managers use of sustainability to identify new investment opportunities and drive improvement projects within their investments.

This work, along with projects like the Carbon Efficient Index, developed with S&P and Trucost and the Private Equity Toolkit, designed to bring a serious look at sustainability into private equity's investment decision process, show what IFC's mission is all about.

Photo credit: acameronhuff

Local Law Red Lights - What's SRI Now?

Life is tricky for the international corporation and the socially responsible investor. Consider poor Google. First Google withdraws from a gazillion dollar potential market in China rather than accepting censorship (OK, it was a little more complicated than that). Now Google finds its Italian managers convicted of a crime for failing to prevent a posting on Google's subsidiary YouTube – thereby violating the privacy of an Italian autistic child who was tormented by bullies in the posted video. UBS wants to disclose customer information in the US (to settle some tax evasion problems it created for itself) but is told not to by a Swiss judge. Variations in law from one country to the next have long posed problems for business, lawmakers and socially responsible investors, but the increased scope of cross-national businesses that could call anywhere home and the fact that the Internet knows no borders seem to be revealing some new strains.

In ancient times, when I was young, corporations doing business in more than one country knew each operation had to comply with local law, and they didn't think much beyond that. Suddenly, the SEC started using US accounting requirements to investigate US public companies that had paid bribes abroad and then failed to account for the bribes clearly and disclose them. The US Congress went a step further with the Foreign Corrupt Practices Act of 1977– it didn't matter if bribing public officials was an accepted way of life in Lower Slobovia, bribing a public official was illegal for the US public company (even if all the activity took place entirely in Lower Slobovia). Japan and most of Europe lacked similar laws. For some years US companies complained that this was a disadvantage in winning government contracts in emerging market nations, but the complaints drew little sympathy, and much of the world eventually adopted similar anti corruption laws with extraterritorial effect. FCPA enforcement is actually undergoing a revival right now.

Another 1977 Congressional action went beyond simple extraterritoriality to effectively supervene local law. The Anti-boycott law banned any form of complicity or cooperation in the boycott of Israel, even when refusal to comply would violate local law in some Middle Eastern countries. US companies effectively had to withdraw from certain markets unless they could find a way to sell that kept them completely insulated from any activity related to the boycott of Israel.

The world was just warming up. South African Apartheid triggered action by Congress (the Comprehensive Anti-Apartheid Act of 1986 banned new trade and investment), a call for boycott by the UN General Assembly and an unprecedented level of activity by investor groups.- all designed not just to supervene local law, but to overturn it.

All these older instances of government and investor social action around local law concerns had a common element – a response to a situation or activity that was widely perceived (at least at the time) as immoral. Some of todays local law issues seem a little more complicated. Consider China – censorship of political speech – bad. Attack on servers to find dissidents -worse. Here we have a good old fashioned evil activity – yet so far governments and investors don't seem to be lining up to protest. Part of this may be fear, China is a big enemy to make and a big market to lose. Part of it may be a philosophy of staying engaged with a country that sometimes seems to be moving in the right direction. Part of it may be timing, the censorship issue hasn't been in sharp focus for long – it may yet generate some serious heat from the SRI community or even a few governments.

What about the Italian YouTube situation?. Wherever you come out on this issue – and free transfer of information, decriminalizing activity that is a mere conduit for free information and other aspects of the YouTube side have merit - it's hard not to recognize that the Italians have a legitimate interest in protecting the privacy of Italians, especially autistic children - not exactly evil. Maybe Google can find a better way to screen YouTube postings for privacy violations, maybe it will have to pull YouTube out of Italy, maybe Italians will be so worried about losing YouTube they will change their law. In any case, you won't see Congress looking for ways to override Italian law and you won't see investors boycotting Italian stocks in Google's defense. Google is on its own.

Which brings us to the Swiss, noble defenders of bank secrecy. With Swiss Army knives opened wide, they hold their banks hostage to this policy – even when it may lead to a disastrous outcome on tax evasion charges in the US. Bank depositor privacy may not sound as good as privacy for autistic children, but it's probably not evil, especially when you consider the fact that the policy is supposed to have an exception where active tax evasion is involved. Once again, no legislature or investor group will ride to the rescue of UBS, they will just have to figure something out. The IRS will keep squeezing and the IRS will not really care about Swiss law applying to Swiss based accounts when US operations of a Swiss based bank have abetted tax evasion by US taxpayers.

For Google in Italy and UBS in America, it's back to the sixties. No matter how complicated it gets, multinationals still need to figure out how to comply with local law in every jurisdiction where they do business. Multinationals doing business in China may be headed for some South African style fireworks. First it was antifreeze in the toothpaste and lead in the toys, now its censorship and server attacks to preserve the status of the powerful. Who knows what's next, but running a capitalist economy with a dictatorship of the proletariat (as represented by party officials and friends, many of whom are getting rich) is like tectonic plates pushing against each other, sooner or later we will have an earthquake. Companies accepting censorship or otherwise accommodating Chinese laws that are 180 degrees away from rights Westerners perceive as fundamental may ultimately need need to do more than just comply with local law, they may need to placate active, socially responsible shareholders.

Photo Credit: Conner395

Citizens United Backlash – Congress and SRI take on the Supreme Court

In Citizens United v FEC the Supreme Court decided that corporations are people too, or at least that domestic corporations can spend money on “electioneering communications” just like a natural person, because the corporation has a constitutionally protected right of free political speech. The decision generated massive and instant concern (frenzy?, panic??) in the media, but the sky has not yet fallen. In fact, the impact of Citizens United is likely overestimated, and there is even some chance that the Citizens United backlash will be more powerful than its direct effect (why isn't frontlash a word?). At the very least, the decision will spotlight on some issues of corporate social responsibility and socially responsible investing that will benefit from the attention.

Why won't Citizens United be a huge deal? First, corporations can still be subjected to any campaign contribution limits that apply to individuals, like the $2,400 per candidate per election limit on campaign contributions for Federal office. Remember, the Supreme Court didn't say that corporations had more rights than regular people. This one is not so important because, as in the actual Citizens United case, limits on campaign contributions don't stop spending on independent ads – the individual or the corporation can swiftboat one candidate, without contributing a penny to the opposing candidate, or even run an “independent”, but supportive, ad. Second, corporations already had plenty of ways to spend money on elections, lobbying and politics in general and corporations don't really love to spend money. To the extent that Citizens United affords an opportunity for more effective political spending, the corporate funds will shift away from lobbying and into more direct electioneering. Citizens United will not, in and of itself, greatly change the cost/benefit analysis that already went into corporate political spending, and therefor it won't greatly change the total amount of corporate political spending. Third, corporations are nervous about making stockholders and customers angry. We'll consider some more refined SRI aspects in a moment, but even the most irresponsible corporation will think twice before putting its name on a political attack ad if it has to deal with a broad segment of the population as customers and/or investors.

There's backlash brewing on at least two fronts. Because Citizens United is based on a constitutional right, Congress can't overrule it with legislation, but take a peak at the summary headings from Citizens United legislation introduced by Senator Schumer and Congressman Van Hollen:

1. PREVENT FOREIGN INFLUENCE IN U.S. ELECTIONS;
2. BAN PAY-TO-PLAY (includes ban on campaign expenditures by govt. contractors);
3. ENHANCE DISCLAIMERS TO IDENTIFY SPONSORS OF ADS;
4. ENHANCE REQUIREMENTS FOR DISCLOSURE OF POLITICAL EXPENDITURES (includes reqd. web site posting for each expenditure within 24 hours);
5. PROVIDE LOWEST UNIT RATE FOR CANDIDATES AND PARTIES;
6. PREVENT CORPORATIONS FROM COORDINATING THEIR ACTIVITIES WITH CANDIDATES AND PARTIES.

If passed, this would make it impossible for government contractors and uncomfortable for all public companies to take advantage of the new electioneering opportunity created by Citizens United. Some elements of this legislation would effect current political spends, not just the new areas of electioneering expenditure opened up by Citizens United. Even if it's tough to get anything passed now, things will change quickly if corporations go crazy with electioneering activity.

In addition to possible legislation, Citizens United is a wake up call on corporate governance issues that have long surrounded corporate political activity. An approval process in which the board of directors is required to provide detailed prior approval of political spending and political spending is disclosed in some detail have long been best practice. Citizens United is already getting shareholder groups excited again about political spending. On February 24 the Council of Institutional Investors and Center for Political Accountability announced a letter writing campaign to persuade the companies comprising the S&P 500 that Citizens United would create new pressures and risks, making disclosure and board approval even more important.

The Citizens United backlash will dampen the effect of the decision itself and create a renewed focus on corporate electioneering and probably an even broader category of political expense,including lobbying. The backlash could go even farther. Is the issue for the SRI community just process? Consider Discloco, a company that has a great process to approve and disclose political expenditures, but uses the funds as follows: A) TV ad supporting a candidate who will vote against carbon cap legislation (because Discloco has old plants that are hard to retrofit); B) lobbying Congress for a loophole to be added to a new tax bill in conference, one that will benefit only the three companies in Discloco's industry; C) lobbying the administration to seek trade sanctions against foreign competition – the foreign competitors are actually selling goods at less than their true production cost thanks to government subsidies. Case A, and probably Case B, may give pause to anyone looking for socially responsible investments. Should corporations try to change the rules with political spending, or leave the rules to the voters, the ones who are actually people? Case C is a reminder, not all political expenditures are about changing the rules, sometimes it's about getting the system to work the way it is supposed to work. A total legislative ban on corporate political spending (if it was constitutionally possible), or a mutual fund using an absolute negative screen for any corporation that reports political spending, might be too simple to work. In any case, watch for that Citizens United backlash, and watch for it to generate a discussion on social responsibility that goes beyond approval and disclosure processes and takes on the substance of corporate political activity.

Photo Credit: Sam Ruaat