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June 02, 2005
As HIV/AIDS Migrates Beyond Africa to Other Emerging Markets, So Too Do Business Risks
    by William Baue

Concern over HIV/AIDS-related business risks is also shifting from the socially responsible investment community to the mainstream investment community.

Concern over the business risk of the global migration of HIV/AIDS is spreading from the socially responsible investment (SRI) community to the mainstream investment community. The concentration of HIV/AIDS in Sub-Saharan Africa (home to 65 percent of global cases) is now dispersing to economically significant emerging markets such as Brazil, Russia, India, China (the "BRIC" group, home to 42 percent of global population and 8 percent of global gross domestic product.) This according to a recent report, HIV/AIDS Beyond Africa: Managing the Financial Impacts, jointly produced by SRI firm F&C Asset Management and the mainstream firm UBS Investment Bank.

"I think it's incredibly important that UBS has done this," said Dan Rosan, director of the public health and access to capital programs at the Interfaith Center on Corporate Responsibility (ICCR). A coalition of 275 faith-based institutional investors with $110 billion in assets, ICCR advocates for companies to address HIV/AIDS as both a business and human rights issue, among many other things. "This report will make my job as an advocate significantly easier, because we can bring together the very "buttoned-down" concerns of UBS with the humanitarian concerns of the ICCR members providing treatment and service on the ground in Africa and in India."

Mr. Rosan also applauds the work of ICCR associate member F&C, though he laments that the faith-based SRI community has had to lead on HIV/AIDS issues in the relative dearth of input from the secular SRI community, with the exception of Boston Common Asset Management. In this sense, UBS is far beyond many SRI firms in terms of its analysis of HIV/AIDS issues, and the analytical sophistication UBS brings to the table clearly enhances the report.

"I have only good things to say about this report: I think it's well written, a must-read for business leaders and public policy makers," Mr. Rosan told "It addresses a number of issues that have been discussed in different locations but have never been pulled all together, so it paints a whole picture in terms of what the risks are, how can those risks be mitigated, and how the market evaluates those risks."

"To me, the meat of the report is when it asks whether risks posed by HIV/AIDS affect the valuation of stocks--that piece has really been missing from the research," added Mr. Rosan.

Using UBS's Stock Screening Tool, the report authors matched a set of 34 South African firms (due to the high HIV/AIDS prevalence there and firms' familiarity with the problem) with same-sector "pairs," one set from the developed markets and one from emerging markets. Comparing profit margins yielded no clear difference in analysts' fundamental expectations. Comparing valuations, however, produced striking differences, with South African firms valued lower than their counterparts in both developed and emerging markets.

"There appears to be a 'South African risk premium' in valuations," state the report authors, Julie Hudson and Shirley Knott from UBS and Karina Litvack, Kirsty Jenkinson, and Anna Krutikov from F&C. "Markets often move more quickly than companies and analysts in reflecting the impact of change."

"One possible explanation of this movement is that, amongst other things, the presence of HIV/AIDS could be affecting the valuations of South African firms," the authors continue.

A logical extension of this line of reasoning is that companies in the BRIC countries will likely experience the same "risk premium" effect on valuation and thus trade at a discount in the absence of significant action to address HIV/AIDS-related problems.

"The report does not go that far, but I, as an ICCR program director, would go that far," said Mr. Rosan.

Another standout aspect of the report that also breaks new ground is its recommendation to utilize the "net present value" (NPV) accounting technique in valuing the impact of HIV/AIDS.

"The net present value approach is their plea to change the way that you account for HIV/AIDS programs so that they become essentially investments rather than costs," explained Mr. Rosan. "This strategy really impacts the incentive stream--accounting for HIV/AIDS impacts using traditional methods creates disincentives to addressing the problems, but the NPV method apparently lowers those barriers, so looking at the accounting is important, but I've never seen anybody look at it before."


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