Environmental Resources Management (ERM), an Asia-Pacific consultancy for environmental, health, safety and risk management, has released a report highlighting Hong Kong companies' poor record in appealing to global sources of capital invested along socially responsible lines - and therefore missing out on a rapidly growing source of funding.

Socially responsible investing (SRI) is increasingly popular among retail and institutional investors in North America and Europe. SRI funds actively invest in companies that demonstrate good corporate governance and follow policies friendly to social, environmental and economic issues. The argument goes such companies are better managed and have a long-term interest in sustainable development, and so will provide superior long-term investments.

ERM says now SRI funds in the United States amount to $2.5 trillion and are growing 22% per annum. Even faster growth is taking place in the United Kingdom. Several index vendors such as Dow Jones Indexes and FTSE have established SRI indices to meet the needs of this growing investment base.

Alas, companies in Hong Kong play a small role in those indices, so ERM is making the point that as long as companies here dismiss SRI as a waste of time, they automatically lose out on this capital pool, therefore indirectly raising their cost of capital.

Dow Jones and FTSE together include five local names: Hang Seng Bank and Hutchison Whampoa in the FTSE4Good Index, and Li & Fung, New World Development and Swire Pacific in the Dow Jones Sustainability Index.

That leaves a lot of Hong Kong's great and, um, good out of the SRI loop. Index providers such as FTSE are also encouraging constituent company managers to remain on the list by requiring high standards in environmental reporting.

So far in Hong Kong, only MTR Corporation has begun issuing such reports. ERM wants other companies to understand that they will come under increased scrutiny from foreign fund managers and analysts, and need to learn how to provide the kind of information they want. It also suggests the Hong Kong Clearing and Exchanges recognize SRI as a benchmark for improving corporate governance standards.

Interviews with fund managers promoting SRI products reveals that SRI has not taken off in Asia. This is not because local managers are insensitive, but because most are simply unaware of SRI, or do not understand it. SRI is underpinned by European notions of fraternity (for example, it is used to encourage companies to employ and train people instead of moving jobs abroad). In America SRI got its start by Christian organizations and endowments, and is also used to pursue social objectives such as equal opportunity for minorities.

These local uses of SRI can sometimes obscure its more universal subjects such as the environment and minority shareholder rights.

Like corporate governance in general, SRI often intrudes on family-owned and controlled companies' sense of what is their private business. Just as many Asian listed companies have made progress in terms of investor relations, however, the growing heft of international SRI capital is likely to have a gradual impact on managements here.