BM&FBOVESPA Sustainability Index & the Responsible Practices of Brazilian Corporations ISSUE BRIEF EXECUTIVE SUMMARY sustainability practices of companies, both the member com- panies as well as those that were never part of the Index. The BM&FBOVESPA, Latin America’s leading exchange in ISE served as a reference guide for initiation of sustainability number of transactions and one of the world’s largest in market practices as well as for their continuous improvement. value, created the Corporate Sustainability Index (ISE—Índice de Sustentabilidade Empresarial) in 2005 with financial support Almost all of the respondents of group 1 said they improved from the International Finance Corporation (IFC). At the time their sustainability practices as a result of their participation in of its creation, there was only one emerging market sustainabil- the ISE: 86 percent of the companies perceived an improve- ity index, the Johannesburg Stock Exchange in South Africa, ment in their environmental and governance performance, which was created in 2004. According to the World Federation while 57 percent of the companies noted an improvement in of Exchanges, there are now more than 50 sustainability in- their social performance. Several companies in groups 2, 3, and dexes around the world, across their 51 member exchanges.1 4 noted the importance of participating in the ISE admission process, as it provides companies with a better understanding of In launching the ISE, BM&FBOVESPA and its technical their limitations regarding corporate sustainability practices. partner Fundação Getúlio Vargas (FGV) sought to develop an investment product that could be used by responsible A company in group 1 that belongs to several indexes stated: investors to facilitate the investment process, either by buying “ISE is more rigorous than other indexes as we have to provide securities issued to track the ISE, or by using the analysis evidence of our practices;” another company noted: “Being in ISE performed by the Index managers as proxies in their own has allowed us to differentiate from the competition in services, investment decisions. The ISE was designed to create an which are basically a commodity;” and a company that tried efficient investment mechanism to group companies with unsuccessfully to become a member indicated: “The ISE ques- superior performance that manage environmental, social, and tionnaire has been a very valuable roadmap for our sustainability governance risks and opportunities. strategy and hope that one day we will qualify.” It was anticipated that corporate sustainability leaders would The firms that have been in the Index (for some time or since show superior performance and that, consequently, the inclu- its inception) report valuable benefits in terms of improved sion of a company in a sustainability index would stimulate sustainability practices, better reputation, and, to some extent, demand for their shares, and potentially increase their price. positive impacts on their stock price, access to capital, and In order to be included in a sustainability index, companies liquidity in the stock market. have to demonstrate the quality of their sustainability prac- tices, a process that could improve the company’s competi- The evaluation found that the expected benefits from the ISE tiveness and may lead to an enhanced reputation (in both the membership, as well as the perception of the obtained results, financial, and the product and services markets). are rather high (Figure 1). The major benefits seem to be in terms of the companies’ own review of their sustainability Coinciding with the fifth anniversary of the ISE, IFC commis- practices, leading to increased competitiveness, satisfaction of sioned an evaluation of the Index’s impact on the corporate sus- being a responsible company, and an improved reputation. tainability practices of its member companies. The objective of this evaluation was to assess the impact of the Index on strength- FIGURE 1. RESPONSES TO EVALUATION QUESTIONNAIRE ening the sustainability practices of its member companies. ON THE PERCEIVED BENEFITS OF THE INDEX Findings and conclusions were based on companies’ responses to (Group 1 - companies that have always been in the index) an online questionnaire, supported by personal interviews and desk research of over 40 Key Performance Indicators over time, 50 in publicly available information about a company. In order to 40 assess the impact of the ISE on its member companies, these 30 were divided in four groups. Group 1 comprised companies that 20 have been in the Index since its inception; group 2 consisted of 10 companies that were members, left the Index, and were later 0 readmitted; group 3 included companies that were members Better Public Access Increase in Improved sustainability relations to capital share value competitiveness and left the Index; and group 4 consisted of companies that performance were never part of the Index. From this evaluation, it was con- No expectation Reasonable Expectations cluded that the ISE had a considerable impact on the corporate Low expectation High expectations 1 World Federation of Exchanges, “Exchanges and Sustainable Investment,” August 2009. 2 ISE & the Responsible Practices of Brazilian Corporations The ISE supported a rapid move to sustainable practices among The evaluation of the ISE’s impact on corporate sustainability listed firms, with most relatively large companies with liquid also allowed exploration into the impact on the develop- stocks eager to participate. As experience has been gained, the ment of the Socially Responsible Investment (SRI) industry. requirements for membership have been tightened, and fewer Following the introduction of the ISE, there was a rapid shift firms have been applying. The percentage of companies that to the creation of new SRI funds, but most of them have accept the invitation to apply for membership has dropped remained relatively small, with the market controlled by continuously from 52 percent in 2005 to 38 percent in 2009, the two funds that existed before the creation of the ISE. In while the number of invited companies has remained relatively October 2010, there were 10 sustainability funds (not includ- constant at around 130.2 During 2010, this number increased ing Governance Funds that have existed before the creation of to 183 companies and the response rate dropped to 29 percent. the ISE), managing $580 million. The largest two, which ex- isted prior to the ISE, manage 70 percent of the assets. Most Since the launch of the Index in 2005, sustainability in Brazil of the observed growth has resulted from value appreciation. made significant progress overall. This is evidenced by the growth of the Instituto Ethos’ (an institution promoting The Index has had limited success in serving as a bench- corporate responsible practices in Brazil and Latin America) mark for larger investors, as it has a relatively small number member companies, which increased from 200 companies in of companies, which provides only partial diversification. 2000 to almost 1,400 in 2010. It is also reflected in the number Besides this structural issue, the evidence that corporate of signatories to the Global Compact:3 in 2006, approximately sustainability is important for investors because it aims to 92 out of 3,200 (~3 percent) signatories were from Brazil, increase long-term shareholder value by integrating long- while in 2010 the number had jumped to 354 out of 7,700 (~5 term economic, environmental, and social aspects into the percent). Moreover, Brazil is the developing country with the business strategy, has also been limited. largest number of financial institutions that are members of the Equator Principles4 (eight out of a total of 68 members in 2010). There is a trade-off between stringent sustainability criteria and the usefulness of the Index to investors. The more investors are ISE has been one of the many efforts undertaken in Brazil to interested in the ISE, the more incentives companies receive to promote sustainable practices. However, 64 percent of group adopt and implement responsible practices. In order to improve 1 companies (always listed on the Index) stated the ISE was the impact on the financial markets (access to capital, stock the most important factor in developing sustainable practices prices, liquidity), the evaluation suggests that the Index needs to over the past five years. become an investment benchmark that is used to construct and compare SRI portfolio performance, and to attract domestic Sustainability indexes are constructed to act as independent, and foreign investment to the Index and its component stocks. consistent, and rational benchmarks for private and institu- tional investors on the evaluation of the performance of their In summary, the expectation that the ISE would contribute sustainability investments (including funds focused on sustain- to increased sustainability awareness and improvements ability companies). As such, liquidity, access to capital, and in the responsible practices of listed and non-listed firms stock prices are expected to be favorably impacted. However, in in Brazil, as well as broader awareness of sustainability in the case of the ISE, no such evidence could be found. Brazil has been confirmed. Moreover, the evaluation found that the removal of a com- Looking to the future, for the Index to continue to have an pany from the Index had little to no impact on the price of its impact on the companies’ sustainability practices, it must have share, or on the reputation of the firm and its sustainability an impact on the financial community as well. The sustainable practices on the short term. This does not imply that com- investment community in Brazil should therefore consider: panies do not benefit from being socially responsible (e.g., in the form of access to markets, better prices, lower costs, better • Stimulating commercial demand for ISE by outreach to value for their assets, better reputation, more productive asset managers, institutional investors, retail investors, and workers, etc.), but it is difficult to prove. regulators to raise awareness of the translation of corpo- rate sustainability into better returns in the stock market. 2 From 2005 to 2009, the number of invited companies was 121, 120, 137, 137, 136 (the issuers of the 150 more liquid shares), respectively. 3 The United Nations Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with 10 universally-accepted principles in the areas of human rights, labor, environment, and anticorruption. 4 The Equator Principles are a voluntary set of standards for financial institutions used for determining, assessing, and managing social and environmental risks in project financing. They are based on World Bank Group guidelines and criteria. ISE & the Responsible Practices of Brazilian Corporations 3 Support can include dissemination and capacity develop- ABOUT BM&FBOVESPA ment on the value of sustainable investment; • Enhancing feedback and transparency of ISE by sharing Established in 2008, BM&FBOVESPA is Latin America’s rationale for both inclusion/non-inclusion to the Index leading exchange in number of transactions and one of the with companies; world’s largest in market value. In 2009, it accounted for 80 • Revising the ISE entry questionnaire so as to allow com- percent of all trading in the derivatives market and 90 percent panies to report back on the most material sustainability of the trading of equities. A listed company, it has 1,079 per- issues related to their industry; and manent employees and 67 interns (figures for December 2009). • Decreasing the turnover of stocks (by tolerating small Through its trading platforms, it holds the registration, clearing deviations from non key responsible practices but without and settlement of transactions with equities, securities, com- tolerating irresponsible ones). modities and others. It also acts as a central securities deposi- tory; licenses software and stock indices; provides information to support the market; and performs risk management activities ABOUT IFC of transactions made through its systems. IFC, a member of the World Bank Group, is the largest The purpose of BM&FBOVESPA is to serve as a benchmark global development institution focused on the private sector for listed companies. In line with this, it has been developing in developing countries. We create opportunity for people to a consistent governance framework aimed at ensuring safe de- escape poverty and improve their lives. We do so by providing cision making, watching over the smooth progress of internal financing to help businesses employ more people and supply processes, controlling systems and procedures, and offering essential services by mobilizing capital from others, and by maximum transparency to all its stakeholders. delivering advisory services to ensure sustainable develop- ment. In a time of global economic uncertainty, our new in- ABOUT FGV vestments climbed to a record $18 billion in fiscal year 2010. For more information, visit www.ifc.org. Created by the Fundação Getulio Vargas, FGV-EAESP is a pioneer in the teaching of Business Administration in Brazil and IFC’s strategy in Brazil focuses on promoting access to finance is one of the principal Brazilian centers of teaching, research, and developing capital markets to reach low-income indi- publication, and consulting in the field of Administration. The viduals, microenterprises, and small businesses. IFC seeks to School offers a complete range of courses for professional training strengthen infrastructure and public services, including health at the undergraduate, graduate, and continuing education levels. and education, by increasing private sector participation. Other The Centre for Sustainability Studies (GVces) is a place of study, key areas include improving the investment climate and helping learning, reflection, innovation, and knowledge production, small businesses join the formal economy. IFC also promotes staffed by professionals with a wide range of multidisciplinary social and environmental sustainable practices, specifically in expertise. It works on the formulation and monitoring of public the Amazon region. As of June 2010, IFC’s committed portfo- policies, the construction of self-regulation instruments, and the lio in Brazil was $2.4 billion. development of business management tools and strategies for sus- tainability on a local, regional, national, and international level. BM&FBOVESPA Sustainability Index & the Responsible Practices of Brazilian Corporations (English and Portuguese): http://www.ifc.org/sustainableinvesting Written by Antonio Vives of Cumpetere, based on an evaluation carried out by Gijs Nolet of Steward Redqueen, Marcelo Linguitte of Terra Mater, and the author. Editorial team: Bajlit Wadhwa, Bruno Faria Maradei and Euan Marshall Special thanks to the staff of BM&FBOVESPA and the Center for Sustainability Studies of the Fundação Getúlio Vargas, FGV for their valuable support. Photo credit: Yosef Hadar The findings, interpretations, and conclusions expressed in this publication should not be attributed in any manner to the International Finance Corporation, to its affiliated organizations, or to members of its board of Executive Directors or the countries they represent. While every effort has been taken to verify the accuracy of this information, neither the consultants nor IFC can accept any responsibility or liability for reliance by any person on this summary or any of the information, opinions, or conclusions set forth in this interim summary. The material in this publication is copyrighted. IFC encourages dissemination of the content for educational purposes. Content from this publication may be used freely without prior permission, proved that clear attribution is given to IFC and that content is not used for commercial purposes. International Finance Corporation • 2121 Pennsyvlania Avenue NW • Washington, DC 20433 USA Tel. 1-202-473-3800 • Email: asksustainability@ifc.org • www.ifc.org/sustainability 4 ISE & the Responsible Practices of Brazilian Corporations