ESG in emerging markets
Companies are managing ESG risk, but they are not telling their stories and some of them have great stories to tell.
Ian Burger, Newton Investment Management
building partnerships with organisations on the ground. “You have to go where you have not gone before to under- stand the countries you invest in,” Barton says. Jankovic shares her optimism that the level and quality of data will improve. “With tailwinds coming from investor demand and an evolution in the understanding of impact of sustainability risks for companies, we believe we will continue to see better data, which can only be, especially for emerging markets, a force for good.”
Who’s the boss?
Along with standards of risk management and the quality of data in emerging markets, investors need to aware of the high level of state and family ownership in these regions. Knowing who controls a company can be more important than profit forecasts or the strength of its balance sheet. Understanding what the controlling shareholder’s motiva- tions are and how they treat minority shareholders could be the difference between investing in a stock or walking away. This risk could be enhanced if the controlling shareholder is the government or a founding family.
“Where a company is going to be first and foremost the instrument of the state,
capital allocation decisions will
clearly not prioritise minority shareholders,” Langridge says. Ownership structures can also be a material consideration for
negative reports following an oil spill at one of its subsidiar- ies. This put the company on many investors’ exclusion lists, so it turned to Robeco for help to improve its ESG record. “Emerging market companies are coming to us as they are concerned about reputational risks,” Fedeli says. “That has been a game changer in the past couple of years.” Another professional is also glad to see improvements in this area. “Looking at it from a macro angle, we are in the nascent stages of getting relevant data,” Barton says. She recalls at the start of her career having to wade through large books to find macro-economic data, which is now avail- able at her fingertips. “It is interesting seeing something sim- ilar with ESG data. We are only at the beginning. “Given that we are in the early stages, you need to think out- side the box in terms of how you conduct due diligence on a country,” Barton says. “It is not enough to do the usual meet- ings with business leaders, economists, political leaders and think tanks. You need to touch base with grass roots in terms of ESG factors.
“That requires a more nuanced approach and we have been Issue 95 | August 2020 | portfolio institutional | 33
As renewables become more cost competitive with coal the conversa- tion is shifting.
Gabriel Wilson-Otto, BNP Paribas Asset Management
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