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."
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
SocialFunds.com. "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."
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.
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
"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."