ESG in emerging markets
come to the fore in emerging markets is still: “That’s what happens”. “Corporate governance failings may be no more common in emerging markets than in the developed world,” she adds. The assumption that corporate governance risk is higher in the developing world is perhaps, Burger believes, due to a perceived lack of maturity. “Many companies in these regions were not trading 150 years ago,” he adds. “They have not evolved from family ownership to a public company with a widely distributed share register. As companies grow into that lifecycle, they start to mature.” Knowledge is power
It is difficult to review ESG performance and assess risk with- out data and disclosures but getting hold of accurate informa- tion on developing nation corporates is reported to be low. Yet Jankovic says that the quality and frequency of sustainable disclosures by emerging market companies is catching up with the levels experienced in developed markets. “Tradition- ally, company disclosure and availability of ESG data in emerging markets has been lagging behind developed mar- kets, making it comparatively more difficult to analyse ESG performance. But this has improved in recent years. The data is getting more detailed.” Robeco has proof that this is happening. For almost 20 years the asset manager has surveyed corporates in these regions
and the level of responses it receives is rising. Indeed, Robe- coSAM’s corporate sustainability assessment questioned 1,250 emerging market companies last year, up from “a small number” 10 years ago. More companies willing to share data about their operations can only be good news. “We have more information than we had a few years ago, which allows us to take new approaches with the ESG analysis,” Nietsch says.
Information is also available from rating agencies. Yet some question the accuracy of their assessments believing that con- clusions can vary. For example, an incident that happened at a company two or three years ago might be factored into one analyst’s view, but not another’s. “Under the hood, variations in timing of information could lead to different outcomes in relation to rating agency rankings,” Langridge says. So, to understand the risks investors are taking they need to do their own on-the-ground research. This takes ESG integra- tion beyond scores, disclosures and research notes, Mary- Therese Barton, head of emerging market debt at Pictet Asset Management, says. “A score is only as good as the data coming into it and which is only as good as your interpretation of that score,” she adds. “To interpret that score properly you need to have a good understanding of the underlying issues. You cannot just buy these things off the shelf; it needs to be inherent in what you are doing.
You have to go where you have not gone before to understand the countries you invest in.
Mary-Therese Barton, Pictet Asset Management
“It is not enough to do standard country due diligence trips anymore,” Barton says. “You need to understand a country, top down, bottom up, and ESG is a core part of that.” Then there is the issue over the lack of a universal standard. “Even if they are disclosing on the same topic, they may use different metrics, frameworks and terminology in different parts of the world to communicate with investors,” Nietsch says. “That is why it is important to have good relationships with companies to make sense of the disclosures.” This for Burger means having to show more commitment. “Ultimately, we need to undertake more due diligence,” he says. “It takes time to engage with companies, it is not as sim- ple as just making a one-hour call.
“It cannot be outsourced,” he adds. “It needs to be done inter- nally if you want to fully integrate it into your investment decisions.”
Doors appear to be opening when it comes to such enhanced due diligence. Fedeli says that 10 years ago there was little openness towards engagement from emerging market com- panies, but that has slowly changed as management and directors have become more aware of the power shareholders have.
As an example, she recalls meeting the finance director of an energy company in a developing nation which had received
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