Emerging market debt – Roundtable
information can be shown to drive invest- ment performance. So much of what hap- pens in emerging markets is recognising where you have an informational advan- tage and then bringing in multiple team- mates to offer their perspectives. It is about trying to identify the unknowns and getting a sense of what is accurate. Our view is that third-party information is typically stale and has no impact on the ultimate investment outcome. Lundgren: A lot of managers depend on data from Sustainalytics and MSCI, which if you had it today is likely to be for the end of 2019. Having feet on the ground and access to companies gives you more relevant and up to date data. de Kock: That is a trend when comparing developed market strategies with EM. In emerging markets everyone may have used third-party data, but they are now where Matt is. They have tried them and decided to do the legwork themselves. From an ESG perspective, inherently you are looking at the governance of an issuer, but you cannot trust what you are first told
about environmental and social
issues. You have to dig deeper as you can- not rely on external data providers to get that colour and coverage, whereas in developed markets data providers have enough access and transparency to form a timelier view. There is a divergence between DM and EM. Anthis: We have found that processed eco- nomic or macroeconomic emerging mar- ket data is far from accurate. We started looking for raw data instead, but had to spend a lot of money getting it from various providers and for it to make sense we had to process it ourselves to a shape where it started adding value. Relying on available data on emerging market debt was an issue for us, especially generic top-down data coming from individual sectors of the market.
What impact does this have on ESG-led investing in emerging market debt? de Kock: The informational challenge we
Our approach is identifying the good reform stories that
take time to unfold. Matthew Murphy, Eaton Vance
bond, but Asia is still catching up. Despite that, we have seen green bonds pricing at a discount to conventional bonds, so the cost of capital has been lowered. Murphy: Changes in a country’s level of economic freedom has a direct impact on investment outcomes. That is rule of law, soundness of money, responsible fiscal policy and responsible regulation. When we engage with countries, we show them that if they improve in these areas then their borrowing costs will decline. All the empirical information proves that. A country’s risk premium is a function of the risk of investing there, so if they adopt economic freedoms they get to borrow at lower rates.
talked about means it is harder to do. On the social and environment sides, a lot of emerging markets are playing catch up in terms of sources of energy and what is driving productivity in some markets. It is hard to change that at the flick of a switch. It is a multi-year project in some instances.
The big increase that we have seen recently is engagement. Emerging mar- kets are typically smaller, so asset manag- ers that are engaging, even as a debt holder, are having more impactful conver- sations even with sovereigns. We have seen examples of big investors getting involved in sovereign debt and trying to force the hand of the issuer. That has been a big trend we have seen increasing over the past two years.
It is not good enough anymore for a bond manager to say: “We do not have a say because we are not equity investors.” They are expected to engage. Lundgren: If they score well on ESG could they lower their funding costs? de Kock: You see it. We could talk about green bonds, which is a topical area in my neck of the woods in Asia, but if you look at the use of proceeds and the standards around some of those issues you could argue that they are not truly green bonds. The EU has done more in setting regula- tion around what constitutes a green
The key is that economic freedom leads to the ESG outcomes we are all shooting for. If you are looking at the Sustainable Development Goals, 14 of them relate to outcomes such as reducing poverty, increased life expectancy and higher liter- acy rates. So, if you are looking to do good, invest in countries that are improving and engage with them to make sure they continue to improve. Maybe the key difference is that we are not going to make headlines for doing that. No policymaker is going to get up in front of his or her parliament and say: “We are doing X because Eaton Vance told us to.” We need to engage where we are experts and where we have credibility. Transpar- ency is one of the more important ones today. We shared with the finance minis- try of Benin what other sub-Saharan Afri- can countries are doing in regards to transparency and how they need to catch up. If they do such things, they could rea- sonably expect borrowing costs to decline. It happened exactly like that. They came to market earlier this year at much tighter spreads than they had seen before. de Kock: There have been studies on the correlation between ESG scores and the volatility of a bond. It is down to if a bond’s investor base holds onto it through thick and thin because they believe in the
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