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<Economy21> No. 155
2003.07.01

The Successful Completion of the 1st International SRI Conference
Title : "Corporate Values and Socially Responsible Investing are Proportionate"

“Why is the Hankyoreh Newspaper holding this conference? We businesses are having enough trouble surviving the trend of globalization as it is. Isn’t this another one of globalization’s pressures? Shouldn’t the Hankyoreh Newspaper be standing at the opposite end of globalization?” One finance scholar demanded to know.

A president of a small business criticized Socially Responsible Investment as being too unrealistic. “When I worked for a large corporation, we wanted to invest in equipment with foreign capital that favored socially responsible investing. You see, the interest rate was low. But in order to receive the funds, we had to furnish our facilities with equipment that are up to environmentally-safe standards. Therefore, we ended up choosing domestic capital with a bit higher interest rates.” His underlying query was: ‘Isn’t socially responsible investing a concept that is far from our reality?’

Nevertheless, the enthusiasm regarding socially responsible investing was high. On June 17th, around 250 leaders of major corporations, finance, academic circles, and civic groups attended the first International Socially Responsible Investment (SRI) Conference, which was held under the auspices of Hankyoreh Newspaper Co. and co-managed by Hankyoreh E&C and Eco-Frontier. It was held in the Grand Ballroom at the Seoul Plaza Hotel. Although the conference ended over thirty minutes later than expected, few left their seats to leave.

The presenters at the conference stressed the necessity of Socially Responsible Investing. According to Tessa Tennant, the Executive Chair of the Association for Sustainable & Responsible Investment in Asia (ASrIA), “In order for everyone to have the same standard of living as citizens of the OECD nations, there has to be five planet’s worth of energy and resources. However, we only have one planet. Thus, it is the economic system that has got to change.”

If the speculative behavior of the market, the basis of the economic ecosystem, does not change, there will be no way to protect the Earth’s limited resources. The president of Eco-Frontier Co., Jeong Hae-bong emphasizes that Socially Responsible Investment holds the key for resolving the contradiction between value sets and financial returns. “Even if a business’s intentions to protect the environment are stronger than any civic organization’s, if those intentions are contradicted by its profits, they will not come into fruition. The problem could be solved, however, if a company’s value could be raised through its environmental achievements.” That is why it is imperative we choose the method of Socially Responsible Investment.

In this context, ‘social responsibility’ does not only refer to environmental protection. Social responsibility includes the social ecosystem, that is, the will to maintain an environment in which corporations and the economy can continually develop.

Investors Must Come Forth for Corporate Social Responsibility

Because of the reasons above, issues such as corporate governance and sustainable development were discussed further at the conference. Philip Moss, advisor of the United Nations Environment Programme (UNEP), stressed, “The qualitative sector of companies such as ethics, environment, etc. are principally no less inferior than the quantitative sectors i.e., financial affairs because they are all core factors of a company's sustainable development.” Incidents such as the Enron accounting fraud or the Martha Stewart Living Omnimedia insider trading scandal that shook the financial market in the United States last year are also considered to have stemmed from an inability to properly evaluate a company's qualitative hazards.

Pressure is needed for change. In the developed nations, various interest groups such as the government, investors, and civic groups require businesses to be socially responsible and also for sustainable development. Advanced countries such as the G10, are beginning to debate whether or not to incorporate a qualitative evaluation factor in the Basel Agreement and also whether or not to include a provision through the London Principle that would require a board of directors in companies for a division of powers.

In the US, England, and Japan, investors’ activities have proven to be outstanding. Diane Keefe, who is the portfolio manager of the well-known Pax World Funds, noted, “In the US, funds like the Pax World Funds serves to supervise and restrain companies.” This is because of an important market principle : business owners manage and protect their assets.

That is the reason why stockholders who previously cared solely for profits from stock dividends, are now taking into careful consideration the authority of the business’s executive board, local community, government, and suppliers. If a company desires continual development and does not want the value of its assets to drop, it must maintain an amiable relationship with the various groups that have an interest in the company.

Kim Joo-Young, the head of the Center for Good Corporate Governance, believes the improvement of corporate governance and socially responsible investment have a lot in common with the transparency of management, protection of the local community and employees, prevention of corruption, etc. So, both camps could work together in activities such as shareholders’ suggestions, collective lawsuits, and investment guidance through institutional investors.

Related Funds are Large-Scale and Popular in Advanced Nations

Okay. It all sounds very good. But is it possible to convince stockholders and entrepreneurs to invest and bring about changes? Kim Jeong-rae, who has experienced the role of analyst, broker, and fund manager and is currently a team manager of CJ Investment Securities Co., Ltd., shows concern. “In actuality, how well do you think investors will understand and comprehend all this talk about socially responsible investing and sustainable development? Complicated topics like this can lose momentum very quickly.”

The situation is the same with businesses. Whether it is investors or companies, the biggest incentive is financial returns. Tadashi Hayami is the senior manager of a socially responsible investment funds firm, Asahi Life Asset Management. He related his experience, “Before we created the fund, we analyzed what Socially Responsible Investing is. We looked at the history of Socially Responsible Investment in the US and Europe and concluded that the social values are linked with money.” The ‘Asunohane Fund’ that was thus started, has come to gross 35 million dollars, or 42 billion Korean Won. It is a fund that invests in firms that pursue environmental, social, and economic values.

The large scale of the fund reflects its successful outcomes and popularity. In Japan, the first Socially Responsible Investing funds first appeared in 1999. It has recently grown into a 1.8 billion dollar market, according to last year’s figures. The market is also doing well in other developed nations. Philip Moss of the UNEP reported that in 2002, the scale of the market was recorded to be $2.332 trillion in the US, $326 billion in England, $31.4 billion in Canada, and $17.6 billion in Europe. SRI funds are also reported to have a greater rate of increase than the total rate of all other funds in the US. And will the funds still sell if the operating performance experiences stagnation? The market follows the profits.

A rise in competitive power becomes an incentive for corporations. An international business environment has already begun stressing the need for social responsibility and sustainable development. The Montreal Protocol and the Basel Agreement reinforced the standards for energy efficiency in household appliances, cars, and other products. Parts that contain lead, mercury, or other harmful substances as well as electronic products and by-product electromagnetic waves are facing stricter regulations. This can prove to be an opportunity for companies. A company could act beforehand and occupy the market. The director of the Environmental Management Center at the Posco Research Institute, Lee Byung-Wook commented, “Businesses must now provide investors and other interest groups with information on its environmental concerns or social activities in order to build confidence and raise its value.”

However, our soil is still too barren for Socially Responsible Investing to take firm root. The first problem is the speculative nature of the assets market. Nowadays, the Korean Composite Stock Index remains stuck in the 680s. It is lower than ten years ago, which during that time the Dow Jones Industrial Index went up from the 3300s to 9300s. It would rise steadily if there were many stockholders who hold their equity relatively longer. The reason Korean stock prices cannot cast off the yoke of the 500 to 1,000 point range is because there are more short-term investors than there are long-term investors. In fact, Korea ranks first as having the highest number of transactions of stock price index futures options because of all the short-term investments. It will be a challenge to draw socially responsible investment, that is essentially long-term, into this market.

A High Potential Despite the Harsh Climate

Woo Jae-Ryong, the president of Korea Fund Research Co., is hopeful about transformations in pension funds and investing culture. “We have 200 trillion Korean won in the pension funds and 250 trillion won in the investment trust sector. The National Pension funds alone ranks in the top five worldwide. There is ample capital. We need to induce it to be used for Socially Responsible Investment.” President Woo sees more possibilities for SRI in another sector. They are the facts that the National Pension Act is waiting to be passed in the National Assembly, strengthening voting rights of the pension fund, and that education on the benefits of long-term investing is making progress.

Another tough nut to crack is employment and the problems between labor and management. Unlike the environmental issues, even global corporations tend to overlook this problem. Choi Jeong-Chul asserted, “In order for Socially Responsible Investing to take hold, a comprehensive discussion that includes labor and human rights is required.” A firm’s social responsibilities includes considering the interests of employees, stockholders, environment, suppliers, local community, and government. “A company that pays careful attention to sustainable development can effortlessly overlook the matters regarding employees. That’s a pretty dangerous thing to do.”

Consequently, Choi also advocated passing legislature making it necessary for companies to release compulsory social reports regarding their operations. The international guidelines for reporting an organization’s activities, the Global Reporting Initiative (GRI), not only includes environmental concerns, but also social values such as equal employment, labor relations, ethics, fair competition, etc. This type of guideline prevents multinational firms from exploiting ecosystems worldwide.

Socially Responsible Investment and Sustainable Development seem to be other faces of globalization.

By Lee Kyoung-Sook     nirvana@economy21.co.kr