ESG in emerging markets
Burger. “We often regard family-controlled companies as hav- ing a long-term alignment with our interests, which can give us comfort,” he says. “But we get nervous with state-owner- ship because of the potential lack of alignment between investors and the state’s political aspirations. “Large sovereign ownership is not necessarily a red flag, but it is an issue we give appropriate consideration – we often avoid investing in companies where sovereigns are signifi- cant shareholders,” he adds. Wilson-Otto admits that, in theory, there could be more risk when investing in a family or state-owned business but believes family businesses can also be aligned with building longer term value, which could match an investor’s objec- tives. The downside is that because it is a controlled entity, there is a risk of corporate governance issues or abuses of power. “You get amazing examples, in developed markets as well as emerging, of family-owned companies that have shot the
lights out, but you also see cases where there has been signif- icant value destruction for minority shareholders,” Wilson- Otto says.
A different route
A few years ago, I hosted a roundtable to discuss equities with institutional investors and their asset managers. The head of investment for a local government pension scheme announced that he had sold some of the scheme’s passive investments to fund an active strategy, declaring: “If you want to be sustainable in emerging markets, you have to go active.”
The active fund manager sitting opposite him nodded in agreement, but this is not a universally held view. BlackRock’s Marta Jankovic is one such opposing voice. “We believe index investing enables investors to implement their sustainable preferences in an explicit and consistent way across different exposures,” she says. “We hear people say index investing is not flexible enough for sustainable strategies, but that does not reflect the variety of ways investors use ETFs and index funds to take control of their investment outcomes.
Emerging market companies are coming to us as they are concerned about reputational risks. That has been a game changer in the past couple of years.
Fabiana Fedeli, Robeco
“Index investors are active investors because they make active investment decisions. This extends to sustainable investing, where investors can use index investing to achieve a sustain- able objective.”
Despite the pandemic, investor demand for index strategies, including emerging markets and global sustainability, is growing. Indeed, sustainable ETFs and index mutual funds had $220bn (£172.6bn) under management last year. Accord- ing to Morningstar, index funds and ETFs represented 21% of European sustainable fund assets as at end of 2019. Black- Rock anticipates that the level of assets in these vehicles could grow six-fold to $1.2trn (£941.7bn) within the next decade. ¹ Jankovic also points out that indexing is particularly valuable in the context of creating a common language for sustainable investing, underpinned by the transparency of rules-based ESG methodologies and product characteristics, adding that index approaches can deliver measurable, deliberate and pre- dictable outcomes. Examples include improving ESG scores or reducing carbon emissions. ²
“The debate around active versus index investing does not consider that ESG indexing can drive better data disclosure,” she adds. “ESG data underpins all of our sustainable index products and we see companies are getting more savvy about the importance of sustainability-related disclosures and ESG ratings. This makes sustainable indexing an important way to deploy responsible capital at scale.”
Investors analysing data is typically followed by engagement, which is not a problem in the passive world.
34 | portfolio institutional August 2020 | issue 95
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