W&F Issue 5 2018

www.wealthandfinance-news.com 6 Wealth & Finance International - Issue 5 2018 Founded in 2008, Magni developed the Sustainable Wealth Creation principles, based on widely accepted economic concepts, by researching the accounting, legal, regulatory, adjudicative, and economic infrastructures of countries. Its extensive database goes back 17 years and contains analysis on countries across 280 qualitative factors. The Minnesota-based research and asset management firm believes Countries Matter™ when investing internationally; and Magni scores and ranks investable countries on their ability to provide an environment conducive to effective corporate governance. Around the world there are almost daily news stories about corruption by people in corporations and by government officials. The post-Cold-War euphoria for the global spread of capitalistic democracies has given way to a declining trust in institutions. This shift is one of the reasons for the increased focus on bringing ethics to finance. Initiatives to convert the focus into action use many names, including Socially Responsible Investing, ESG investing, Impact Investing, and Responsible Investing. Fortunately, these initiatives are increasingly collaborating through organisations such as PRI. The growing assets defined as part of Responsible Investing are proof of its impact. After all, the US SIF Foundation reports the total US-domiciled assets under management using SRI strategies grew to $8.72 trillion at the start of 2016, an increase of 33% since 2014 and a 14-fold increase since 1995. Despite being an impressive number, the US has an atypically small share of Responsible Investing assets; especially when compared to European countries where the focus is more pronounced. Historically, investments where ethics and values are applied have had challenges in yielding performance consistent with traditional benchmarks. More recently, the concern has subsided some with such investments outperforming traditional investments, highlighting their increased importance in the market. Research and academic studies show governance is an important consideration to achieving or exceeding benchmarks when constructing portfolios, especially ESG portfolios. Countries with good governance tend to have superior environmental and social performance. Furthermore, recent research shows companies with good “G” also tend to have good “E” and “S” performance. Simply put, good governance can drive good environmental, social, and investment performance. As Martin Gilbert, Chief Executive of Aberdeen Asset Management, stated, “The governance of countries affects the ability of companies to generate value within them, and it is in everyone’s interests to enhance the framework for business.” Honesty and transparency are the foundations of good governance. After all, fraud, corruption and other undesirable actions can more easily occur in opaque environments. The greater the demonstrated honesty and transparency, the lower the risk of adverse news harming equity valuations and the greater the opportunity for a positive impact. An example of this can be found in the corruption scandals that have historically been reported in countries around the world. For years many investors focused on the BRIC countries within the emerging markets (i.e., Brazil, Russia, India, and China). Money poured in driving up valuations because of the perceived opportunities. Yet Researching Governance for a Better Investment Magni Global Asset Management LLC is the global leader in country-level research on corporate governance. We profiled the leading firm and its team which gave us an insight into the company’s success. 1805WF03 corruption scandals, such as Odebrecht in Brazil, are evidence of systemic corruption and have tainted the BRICs. Many elected officials in Brazil are in jail or facing criminal charges. Today the corruption in Russia is so extensive, particularly among the oligarchs, that a website is dedicated to tracking such activities, including money laundering and illegal activities. There are also widespread requirements for bribes in India to get favourable treatment by lower-level government officials and courts. In China, western auditors have had to resign from company assignments as the auditor cannot attest to the financials. Corruption makes valuation more difficult as financial projections are suspect and future profits may benefit the perpetrators of corruption more than shareholders. Corruption is not limited to these four countries. It exists in every country; even countries of the developed markets. At the end of the last century, some companies in the United States collapsed due to accounting fraud. Countries have laws and regulations to prevent corruption. For someone to understand the actual level of corruption in a country, more than reviewing the laws and regulations on the books is required. Magni differs from other research organisation by focusing on behaviour rather than mere assertions. In Magni’s view, governance is measured by how a country or company regulates both itself and the people who are part of its environment, and importantly how it interacts with its constituents. Countries must demonstrate the ability to create an economic, legal, and regulatory environment where output can grow, investment opportunities are attractive, and investor rights are protected.