We find that the index setup and methodology chosen should serve the CGRS well in achieving its goals. After the test phase in 2014, participation for all listed companies will be mandatory. This will give the rating credibility since companies cannot pick and choose to participate. The chosen rating criteria are an adequate blend of Nigerian and international standards, with the explicit aim of evolving over the years to make them progressively harder to meet. In addition, the CGRS has developed a unique three-component rating setup, consisting of a corporate compliance, a director fiduciary awareness and a corporate integrity component. With the explicit addition of a focus on actual company practices and corporate integrity, of special importance in the Nigerian context of course, the CGRS setup is unique in the international context. The plans for the setup of the CGRS also contain a well-thought through selection process for the evaluators engaged in the CGRS rating process which should  – in theory – work well to prevent conflicts of interest and protect the integrity of the rating process. The proposed governance structure with one steering board and three specialized committees is elaborate when compared to other corporate governance indices, but seems appropriate to ensure the credibility, transparency and integrity of the rating system.

In our previous studies of corporate governance indices we have noted the critical importance of transparent communication about an index’s setup and results. Given the complex CGRS setup, including the incorporation of non-public information in the corporate integrity rating component and the generally negative perception of Nigerian business practices, a very high level of index transparency is crucial for the CGRS. The planned comprehensive disclosure of the full methodology and rating results on a singular website would put the CGRS ahead of all existing corporate governance stock exchange indices by a wide margin. In fact, of the currently existing six stock exchange indices based on rating corporate governance, none discloses the individual company rating results.

The success of the CGRS hinges on the successful implementation of its well-conceptualized setup. We are looking forward to see the completion of the pilot phase with volunteering companies later this year and the subsequent launch of the CGRS. An increasing number of stock exchanges is in the process of launching indices incorporating corporate governance factors, often as part of a sustainability index also factoring in environmental and social factors. The Moscow Stock exchange is still planning to launch Novy Rynok some time in 2014 and the Santiago Stock Exchange in Chile has just commissioned a feasibility study for a sustainability index.  In what is a growing number of stock exchanges with indices incorporating corporate governance factors, the CGRS has the potential to stand out for the transparency of its setup and the attempt to measure implementation.

Emerging markets have been lagging in the development of ESG investment and investment products though. However, it seems that the time has come for the systematic incorporation of ESG risk assessments into emerging market investment decisions.  Three major trends are responsible for bringing emerging markets and ESG investing together, until recently separate investment specialty areas, although two of the fastest growing:

1. Emerging markets growth is diversifying and is not predominantly based on infrastructure investments anymore. In addition, a rising middle class represents a new class of consumers increasingly paying attention to sustainability concerns. Both developments lead to an increasing role for sustainability considerations in emerging markets.

2. Many emerging market companies are entering their mature growth phase, consolidating and affording the ability to focus more on management quality and corporate responsibility. These companies also are also facing increasing challenges such as resource constraints, demand for more corporate accountability and compliance with global best practices such as labor standards and reporting guidelines. Companies that embrace the challenge can truly differentiate themselves from companies that do not and offer attractive investment opportunities.

3. Information on ESG practices of emerging markets companies was very difficult to obtain only a few years back. This has changed significantly in a short time span. An increasing number of emerging market companies today publish sustainability reports, a growing number of them in compliance with the guidelines of the Global Reporting Initiative. In addition, for investors willing to purchase rating reports, GMIRatings has increased its ESG rating service for emerging market companies from 688 in June 2012 to 998 as of April 2013.

Indeed, underlining these developments, two commercial emerging market ESG indices have been launched in the past two months.

In February, RobecoSAM, a sustainable investment specialist and S&P Dow Jones Indices launched the Dow Jones Sustainability Emerging Markets Index with 69 companies. The companies are selected based on RobecoSAM’s annual corporate sustainability assessment, which evaluates companies’ sustainability performance based on economic, environmental and social criteria.

In March, asset manager Northern Trust announced the first emerging markets custom index based on MSCI ESG Research and Institutional Shareholder Services’ (ISS) governance screens. The design of the fund applies three screens to the MSCI Emerging Market (EM) Index universe, followed by a sequence of checks on governance and executive independence. The first screen eliminates constituent companies of the MSCI EM Index that have been found to be in breach of the UN Global Compact’s ten principles. The second screen removes manufacturers of controversial weapons ant he third tobacco manufacturers. Following these exclusions a filter is applied targeting companies lacking sufficient independence across ownership, board representation, key corporate committees and audit and remuneration committees.

In addition to these indices representing select companies from a variety of emerging markets, stock exchanges in a number of emerging markets had already launched ESG indices over the past decade. Prominent examples are the Johannesburg Stock Exchange Socially Responsible Investment Index and Sao Paulo’s BM&FBOVESPA’s Corporate Sustainability Index, launched in 2004 and 2005 respectively.

While these are encouraging signs, much work still needs to be done. Two reports published late last year, EIRIS’ “Evolving markets: what’s driving ESG in emerging economies?”, and the Forum for Sustainable and Responsible Investment “Lessons Learned: The Emerging Markets Disclosure Project, 2008 – 2012” found that poor corporate environmental and social governance disclosure remains the number one challenge to investing in emerging markets. The reports also highlighted that knowledge of sustainability reporting practices and international norms varied widely between markets.

As investors are integrating ESG risk factors into their investment decisions in emerging markets, it is clearly time for emerging market companies to take the sustainability challenge serious.

Yesterday, at a press conference, the Institute of Company Secretaries of India (ICSI) announced that it was planning to launch a corporate governance rating model, to be developed by a 6-member committee in the near future. While the SEBI consultation paper envisions credit rating agencies to carry out the assessments, ICSI plans to appeal to SEBI to also allow other entities to conduct ratings.

The article in Hindu Business Online also explains that the committee has already designated two types of ratings of the model: India Mandatory and ICSI Desirable. India Mandatory will be given to companies who comply with India’s mandatory corporate governance requirements in their entirety. Since one might imagine that this should be the vast majority of companies, ICSI Desirable offers companies a chance for distinction. According to the president of ICSI, this rating will be awarded to companies going beyond mandatory requirements. How far above or what kind of best practices a company needs to follow to obtain such a rating has not been specified yet. Clarification should be offered upon conclusion of the work of the committee.

Sergei Sinkevich, Primary Market Department and Globalisation Managing Director of the Moscow Exchange formulated the motivation for the launch in an interview with FTSE Global markets:

“We are introducing this segment for two reasons: on the one hand we are planning to attract long-term investors who are ready to invest in “high-quality’’ issuers. On the other, we want to attract issuers that want to establish reputational capital and who expect to enjoy market premia, added to the price of their shares, which clearly demonstrate their exemplary practice of corporate governance and transparency.”

In essence, the rationale is the same that led to the launch of the “Novo Mercado” in Brazil 12 years ago: the stock exchange introduces a set of special listing rules, in particular concerning shareholder rights, that go beyond the host jurisdiction’s rather weak protection offered to investors. The Novo Mercado, consisting of three different tiers with increasingly stringent corporate governance requirements, has been a resounding success: virtually all new listings in Brazil occur in the special corporate governance segment and the index based on the segments has soundly outperformed the BOVESPA benchmark since its inception. Given this success story, the “Novy Rynok” is directly modeled after the Novo Mercado.

A November 2012 presentation by the Moscow Stock Exchange, available on the Russian Investor Protection Association website, lays out the details of the planned segment. The basic principles and some of the specific criteria addressing these principles are:

1. Procedures and obligations associated with public offerings to protect new shareholders. Provisions targeting this principle include the obligation that public placements must target dispersion and a 6-month lock-up period following an IPO.

2. Additional provisions for the protection of existing shareholders: Tag-along rights, a minimum of 3 independent directors on the board and a majority independent Audit Committee.

3. Transparency and disclosure: IFRS based quarterly statements in Russian and English; ongoing disclosure in English; detailed disclosure of related-party transactions and of the ultimate controlling shareholder, annual shareholder meeting material to be published in English and Russian 20 days in advance.

According to the presentation, internal approval procedures within the Moscow Stock Exchange for Novy Rynok are supposed to be finalized in the first and second quarter of 2013. The project is to be launched in the third quarter, with the first issuers joining the segment. The stated goal is to have at least 5 companies listed in the new market in 3 years. This seems overly modest. Brazil’s Novo Mercado started out with 18 back in 2001.