ESG in emerging markets


Emerging markets do not have a monopoly on poor standards of governance.


Kathryn Langridge, Manulife Investment Management


Weak policy and regulation have played a role as has a lack of awareness. China is an example of one government that has realised it needs to change, especially given that 1.4 billion people need freshwater to drink. It is spending billions of dol- lars on improving air quality and clearing pollution from its soil. Not all developing nations are as wealthy as China and are not setting sustainable policies. Being responsible for feeding millions of people, supplying them energy and ensuring access to clean water and medical supplies could be why. They are dealing with today’s problems, not what are per- ceived to be the challenges of tomorrow. Fedeli points to India, which is home to more than 1 billion people, as a country facing such a conflict. “Vast parts of its population do not have access to power, sanitation or clean water, so what do you think the priority is between using coal to generate power and not being able to provide power?” she says. However, Fedeli believes that environmental concerns are pushing their way up the agenda with air quality in New Delhi causing increasing demand for healthcare.


Higher risks?


New thinking, especially on the environment, could be driven by changing public attitudes. Gabriel Wilson-Otto, BNP Pari- bas Asset Management’s head of stewardship in Asia Pacific, believes so.


“I have seen studies and surveys that point towards increas- ing discomfort around air pollution,” he says. “There has been a push in mainland China against the air pollution lev- els in many cities.”


An APEC event in Beijing a few years ago highlighted the issue. The government halted industrial production to ensure there were blue skies above the city for the conference. “APEC Blue became a phrase for something wonderful but fleeting and raised the profile of the push against air pollu- tion,” Wilson-Otto says. “In my opinion, the people are increasingly influencing environmental policy decisions around the region.”


It is not just public opinion that is swaying policymakers. The falling cost of renewable forms of energy, such as wind and solar, is also influencing change. “Historically, due to the cost of renewables, the world had never been able to de-couple GDP growth and carbon emissions,” Wilson-Otto says. “As renewables become more cost competitive with coal the con- versation is shifting.”


Protecting the environment has not just been an issue of cost.


ESG is more important for investors targeting emerging mar- kets as the risks can be more acute. Many economies in these regions are weighted towards agriculture. There are also reports of human rights abuses through forced and child labour.


Then there is the issue of population growth. While a grow- ing younger demographic could be a benefit compared to the aging populations in the west, it can also be a curse. Eric Nietsch, head of ESG in Asia at Manulife Investment Management, explains that Asia is home to substantial chal- lenges. “There are probably more people in that region under environmental pressure than anywhere else in the world,” he adds. “It is home to almost two-thirds of the world’s popula- tion, which rely on a third of the world’s freshwater, and pro- duces half of the globe’s greenhouse gas emissions.” Of course, as emerging market companies expand, so will their influence. “As these companies grow their impact on the environment and society in Asia creates a strong case for ESG investing,” Nietsch says. But his colleague would like to remind investors that such risks are just as strong in the developed world. “Emerging markets do not have a monopoly on poor standards of govern- ance,” Langridge says. Wirecard, a German payments processor that went bust and is being investigated over alleged accounting malpractices, is an example. Yet despite this scandal, Langridge believes the conventional response when corporate governance issues


Issue 95 | August 2020 | portfolio institutional | 31


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