A Change Fusion – CSR Asia working concept paper on

Establishing socially responsible investment (SRI) criteria in Thailand:

Background and standard criteria comparison

First draft 3.11.08 (internal document)

Overview, global & regional development

Socially Responsible Investing (SRI) also known as sustainable investing or ethical investing,describes an investment strategy which seeks to maximize financial return using additionalinvestment criteria that falls outside the traditional financial appraisal model. SRI allows investorsto take account of wider concerns and encompasses a wide range of corporate best practices for environmental, social and governance factors (ESG).Led by institutional investors, asset and fund managers are increasingly informed on ESG criteriaand are starting to realise that SRI is not just about incorporating additional values into decisionmaking. An SRI focus is also about hedging against the downside of globalisation, long termstability and performance and sourcing additional returns. This has been sharply brought to lightwith the current financial turmoil and macro trends such as climate change and the instability of fuel costs coupled with dwindling supplies.Whilst Corporate Social Responsibility (CSR) is a now a more mainstream term used by manyorganisations, a recent survey by AXA Investment Managers and AQ Research of over 350 globalinvestment professionals, found that ‘ESG’ and ‘sustainability’ has emerged as preferred termsassociated with the SRI field from a selection of 14 other choices.SRI is applicable to many types of financial products, but in practice it is mostly applied to stocks(equity securities). The quantification of ESG performance in the U.S. and in Europe is increasinglyprofessionalised using a combination of resources such as;

•

Specialised rating agencies provide ESG analysis to the market

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More and more financial companies set up their own SRI analysis departments

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Market indices such as the Dow Jones Sustainability Index (DJSI) or FTSE4Good, supplyfund managers with dedicated investment universes where selection for an index is basedboth on financial and non-financial performance.

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The development and growth of the United Nations Principles for Responsible Investment(UNPRI)

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NGOs provide their own expertise and assessment of issues and corporation, for exampleOxfam has recently looked at the ESG performance of companies listed on the Hong KongStock Exchange.Depending on the fund’s orientation and commercial scope, each asset owner/manager who isusing ESG criteria in their investment appraisal process, relies on a combination of theseresources to pick stocks for inclusion in that institution or fund’s investment universe.

Global SRI

SRI has experienced high growth in both the United States and Europe. In the US SRI hasoutperformed the broader universe of all investment assets under professional management. It isestimated that 11 percent of assets under professional management in the US (or nearly one out of every nine dollars) distributed across 246 funds now have some form of SRI criteria associatedwith them. In fact, SRI assets rose more than 324 percent from US$639 billion in 1995 to US$2.71trillion in 2007 while the broader universe of assets under professional management experienced a

growth of 260 percent from US$7 trillion to $25.1 trillion. During 2005-2007, SRI assets increasemore than 18 percent while the broader universe increased less than 3 percents.

In Europe, SRIhas also been on a continuous upward growing cruve; the market grew from

€

1 trillion in 2005 to

€

1.6 trillion in 2007 distributed across 451 SRI funds in Europe.

In South Africa alone, SRI flowinvested in 21 SRI funds amounted to US$1.6 billion.Watson Wyatt recently launched

Defining Moments,

a research publication that describes aradically changing investment landscape that presents both problems and opportunities for investors. It identifies several macro trends that are likely to be well established by 2020. Theseinclude the growing impact of environmental, social, and governance considerations both asindirect sustainable performance influences and as desirable end attributes in their own right.

SRI in Asia

SRI has gained a significant foothold in emerging markets. Roughly US$32.2 billion was investedin more than 235 SRI mutual funds (Unit Trusts) in Asia.

Below are classification of funds andinvestment flow to SRI in Asia Pacific region.Association for Sustainable and Responsible Investment in Asia (ASrIA),More developed markets such as Japan, Korea and Hong Kong have the highest number of fundswhile new players such as Taiwan, India and Thailand have fewer options available. In Malaysia onthe other hand, the majority of assets are set around faith based SRI funds.Most SRI fund’s benchmark are constructed using ESG factors as selection criteria. Some fundsadvocate to a single cause, pure-plays, while others employ combination of causes including;clean and renewable energy, environmental friendly management, workplace practices and labour standards, ethical policies, corporate governance and transparency.

Social Investment Forum Foundation, 2007

Celent financial Consultancy, 2007

ASrIA 2008

Total Number of SRI Funds in Asia (includingfaith-based funds):

243

PublicFundsPrivateEquitySRIPensionMandatesFaith-based

CountryTotal

China

2 0 0 0 2

HongKong

19 0 0 1 20

Japan

59 1 0 0 60

Korea

37 2 6 0 45

Taiwan

3 0 0 0 3

Singapore

3 1 0 10 14

Malaysia

2 0 0 81 83

Indonesia

0 1 0 1 2

India

1 1 0 1 3

Thailand

2 0 0 1 3

SegmentTotal

128 6 6 95 235

No. of SRI Funds by Country:

235

Asia Hedge Funds:

CountryUS$(million)Australia

16,900

China

325

Hong Kong

274

Japan

3,131

Malaysia

Multi-Country

1,034

New Zealand

852

Singapore

125

South Korea

1,32123,976

Private EquityFund

226

SRI Mandates

8,110

Total PrivateEquity & SRIMandates

8,335

Asset Allocation

Eurosif, 2008As shown in the table, investment flow that go into venture capital or private equity weights as highas bonds. In the U.S. an estimated of US$5.3 billion in capital was identified under themanagement of socially or environmentally screened alternative investment vehicles such as socialventure capital, double-and triple-bottom line private equity and hedge funds, typically organised asunregistered limited partnerships or limited liability companies. Moreover, an estimated US$26billion went into community investing institutions that directed capital to communities underservedby traditional financial services.Nevertheless, investors still invest mainly in large caps while the share of small and medium capsis quite insignificant. This is largely due to the lack of appropriate ESG data available to offer financial products from companies in the small and medium cap sector. In this sense there is adefinite need to develop research capacity and capability to allow small and medium caps to tapinto the potential SRI investment flow.

SRI Indices

A number of SRI indices have developed over the last few years and have concentrated ontracking listed companies with ESG performance appropriate to their individual criteria.The eligible universe for SRI index usually lies within common stock indices therefore thecompanies are subjected to the ground rules of that particular index as well as additional SRIcriteria which place greater emphasis on ESG standards.An SRI index can either be sector specific or sector neutral. Sector neutrality actually limits thefinancial risk associated with sector bias. In fact, an SRI index and sustainability index arerelatively similar. Well know sustainability indexes in the U.S. and in Europe such as DJSI,FTSE4Good, Ethibel Sustainability index, Calvert Social index, KLD’s Domini400Social index arebeing referred to as both sustainability index and SRI index. Nevertheless, SRI index is created tocater to a more specific need in term of socially responsible investment.In Asia, Japan, South Korea and Hong Kong are market leaders in SRI indices . An well plannedand developed SRI index will not only raise the general profile of ESG and SRI among the localcompanies but also attract a growing number of SRI investors from overseas. As the market for SRI in the U.S. and Europe is becoming more developed, SRI investors are continuously looking tothe Asia Pacific region to expand their investment portfolio. However, they are severely limited bythe fact that there is little in the way of high quality research for Asian companies. This is partlydue to a lack of disclosure on the part of companies, but also the fact that ESG research has notbeen forthcoming.

Asset Class %Equity 46Bonds 13Venture Capital/PrivateEquity 13Alternative/Hedge Fund 9Real Estate/Property 5Monetary Deposit 4Commodities 4Microfinance 6

Equities form the majority asset class employed byinvestors, followed by debt instruments such asbonds. A survey conducted by Eurosif

indicatesthat 46% of the investment in European SRIs is inthe form of equity investment while 13% of theinvestment is in bonds. As investors become moreopen to the alternative investment options, venturecapital investment has also begun to gain ground inthe SRI investment space.