ESG in emerging markets
In 2018, Donald Trump declared war on China. This was dif- ferent from most conflicts in that not a single bullet was fired. Instead trade tariffs were implemented. This was an econom- ic war which was, among other things, declared to stop cheap imports flooding into the United States. Such action by the leader of the world’s largest economy shows how far emerging markets have come as an economic powerhouse.
A large, youthful workforce, a growing middle class and high economic growth are the fundamentals that make emerging markets an attractive hunting ground for investors. Indeed, emerging market stocks have been used as a diversi- fier by some, while others just want exposure to the huge growth forecasts attached to some of these regions. These growth projections have been revised to reflect current events, but the fundamentals are likely to put these markets back onto their growth trajectory.
This could be especially true for well-managed businesses in wealthy Asian economies, including South Korea, Taiwan and China. Yet regulation across the developing world has been criticised for not being stringent enough, while the standard of corpo- rate disclosures needs to be improved.
This last point makes ESG more important in emerging mar- kets. Due to the information environment typically being weaker it creates more of an opportunity for ESG to lead the insight in company selection. “Emerging market companies can profit from managing ESG issues well, especially where governance is concerned,” says Marta Jankovic, director, EMEA head of iShares sustainable at BlackRock.
The question is, while many developed world investors will agree with Jankovic, are emerging market governments and regulators ensuring that ESG risks are being suitably man- aged? And, do executives in these regions understand the im- pact a robust ESG policy can have on their business?
Getting the message Research highlighting the benefits of implementing sustain- able business practices is feeding through to developing nation companies, says Kathryn Langridge, senior portfolio manager and head of emerging market equities at Manulife Investment Management. “Across emerging markets there is an increasing realisation of the importance of not just engag- ing with investors but incorporating ESG risk management into their businesses,” she adds.
There are probably more people in Asia under environmen- tal pressure than anywhere else in the world.
Eric Nietsch, Manulife Investment Management
Langridge is seeing some emerging market companies spend years improving their management of such exposures, but she is also seeing companies who just “do not get it”. More and more emerging market companies and govern- ments are getting it, yet ESG is still less established than it is in Europe as an investment concept but is catching up fast, says Fabiana Fedeli, global head of fundamental equities at Robeco and a portfolio manager in the firm’s emerging mar- ket equity team. There are large differences in the level of awareness from country to country. Awareness is growing faster in some places than others. China is a country that has warmed to managing ESG risk in recent years. Brazil is another convert thanks to a series of environmental and governance disasters.
“The environment is at the forefront of many companies’ plans and strategies, but we are not where we should be,” Fedeli says. “There are still local governments and companies in developing countries who are not used to requests for information or strong scrutiny from investors.” But are investors underestimating the pace of change? The results of company engagements conducted by Newton Investment Management have sometimes surprised
Ian
Burger, Newton’s head of responsible investment. “Companies are managing ESG risk, but they are not telling their stories and some of them have great stories to tell,” Burger says. “This is frustrating, but it also adds an element of opportunity.”
30 | portfolio institutional August 2020 | issue 95
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