Roundtable – Emerging market debt
and in all asset categories you have to play the game, but you have to avoid knee jerk reactions. For example, because of what is happening with some minorities in China, it is easy to say, “that’s it, out of it”. But if you dig deeper, some Chinese corpora- tions have robust approaches and disclo- sures on ESG matters. You could be sur- prised at what is going on beneath the surface.
ESG analysis will undoubtedly play a seri- ous role in emerging market debt going forward. Arevalo: A client asked me the other day if ESG is transitory or is here to stay. Abso- lutely, it is here to stay.
It needs to be part of your investment pro- cess. Not only because it adds value, but it is something investors are looking for. Unfortunately, there is no formal ESG process in emerging markets, so it is up to each company to find the best way. We are moving to a universe where there will be more issuance because there is more demand. Last year, there was close to $3bn in ESG-linked issuance. Companies have started to realise that this is the way forward, so they are more empowered to make changes. We have been engaging with Brazilian protein issuers to make changes in what they are doing with the Amazon and with cattle. They have incorporated those changes into their plants. At the sovereign level it is slightly harder, but with corpo- rates you can be a positive influence, so long as everyone moves in that direction. ESG adds value and is here to stay. Pellegrini: There is interest from our cli- ents in this asset class. They are coming to us asking about ESG, it is no longer a way of looking at things that we have to propose.
The horror of the pandemic has led to questions around how capital can be used to benefit the planet and communities. This has been the silver lining from the experiences we have had.
Another reason is because we are starting 26 | portfolio institutional | May 2021 | issue 103
to see returns. If you look at the JPMorgan Emerging Market Bond index, the ESG equivalent has outperformed by 2.4% over the past eight years.
Through an active ESG approach we believe you can enhance returns on top of those offered by a standard ESG approach.
That is why we have been teasing all the inputs out of our proprietary ESG sover- eign framework. We have moved away from third party ESG data providers. We have noticed that such providers have improved the way they collect data, however, you will see a variety of outcomes in their assessment. We decided to create our own framework, using publicly availa- ble data, giving comfort to our clients in terms of transparency. We have found the indicators we believe
Gordon Ross
Chief investment officer LGPS Central
are most correlated to market outcomes, they have an input in the way asset prices will move to help us as investment manag- ers. We have a much sounder framework overall. Obviously, this means using data which at times is backward looking, so we are using artificial intelligence to create higher fre- quency indicators to exploit information from corporates, regulators and databases to give us a forward-looking approach to ESG investing. Going forward we will see a lot more done in the space. Deltcheva: There is no market standard, so every manager needs to define their own framework or use external providers to set some form of ESG scoring. We have an in- house ESG team, which was more than 20 years ago.
Over the past five years, Candriam has extended its broad sustainable fund range, offering fixed income, equities and a hard currency sustainable product. The risk-ad- justed returns have been positive for the
sustainable EM debt hard currency prod- uct, and it outperformed peers. The sus- tainable strategy offers lowers volatility by limiting exposure to higher yielding parts of the EM country universe, while consid- ering social, governance or environmental indicators. Social governance has always been part of EM debt’s creditworthiness analysis because it determines a country’s ability to absorb investments and generate sustainable growth.
What we incorporate more explicitly in our sovereignty sustainability framework now is the impact that developing human, social or economic capital have on the environment. You need to manage natural resources well to progress as an economy. A lot of countries have started focusing on how they are perceived by investors with respect to ESG factors. Of course, we have ESG leaders, like Uruguay, which has always produced a medium-term sustain- ability framework. Chile has joined this enhanced ESG disclosure trends. More surprisingly in conversations with Middle Eastern economies, which are primarily hydrocarbons exporters, we are receiving more ESG disclosure and sustainability framework questions. Our ESG sovereign is proprietary and has shifted towards a clearer focus on the environment. The pandemic in a way has indicated that this environmental bias, adds value. We welcome the development of a global standardised sovereign and corporate ESG scoring systems/frameworks. We try to help countries in any way possible. In our conversations, we advise on how to improve sustainability tracking. Same goes for companies. We provide feedback on ESG market standards and what are good ESG sources that countries and com- panies can follow and report into. Mattingly: How emerging sovereigns and corporates are perceived by investors will heighten over the next two years. No emerging market participant should underestimate the increasing pressure institutional investors are under in terms
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56
