Global emerging markets roundtable
a helping hand. As an emerging market investor, that can sometimes be nice because you have an additional moat around those businesses. That cannot last forever, though. If you want best-in-class companies they need to be exposed to the rigour of competition and these domestic companies have not been as exposed as they could have been. Inderst: Another testing case are the priva- tisations of banks and infrastructure com- panies in India. International investors are willing and able to access it, but the jury is out because privatisations are rather politically driven.
Are standards of environmental practices and governance improving in emerging markets? Shihn: Taking ESG metrics into considera- tion has risen up the agenda for almost every corporation across the world. This is evident through the growth of stewardship codes in different markets. Brazil and South Africa, for example, have stringent reporting requirements on governance and diversity. There is often a difference between what ESG topic is seen as important to address within one market compared to another, but there is a growing appreciation that a more ESG-minded approach is better for everyone. So, it is being pushed up the agenda, but the availability of data and the quality of reporting in emerging markets is behind what we see in Europe and the US.
Emerging market companies have global clients and supply chains, so they will start reporting more. There will likely be a share price tailwind which emerging mar- ket companies will benefit from as they start to report ESG data more regularly and reliably. Smith: There are three ways to approach sustainable investing. First, invest in tran- sitioning companies. The important thing here is not to open Pandora’s Box by investing in anything and saying it will transition. You should have confidence in
44 | portfolio institutional | May 2022 | issue 113
the transition and the commitment of management to that plan.
The second area is investing in balanced stakeholders, which are companies with high ESG standards. They are showing the way by setting targets around their carbon footprint, and around best-in-class disclosures and setting the agenda. The third is solution providers, which are companies selling products and services that benefit society. It is in emerging mar- kets where we see the best opportunity set for solution providers due to the extent of the underserved need. For example, 60% of global emissions come from emerging market index countries, while almost 15% are from frontier markets. So, almost 75% of emissions are from these countries, yet they are well behind the curve in terms of energy transition investments, other than China, which is setting the pace. If you are looking for the highest growth in these solutions, it will be in emerging markets. Whether you are talking about access to medicines or financial services, or the build-out of infrastructure, it is in emerging markets where we will see the highest levels of durable growth. In the best-in-class ESG companies we do not have the same opportunity set as we do in developed markets, but in the solu- tion providers we have an unparalleled opportunity set. It is important to have diversification of exposure in any strategy, including a sustainable strategy, but our view is that you should have a dispropor-
tionate exposure to those solution provid- ers, in my opinion. Pickering: I like to avoid ESG colonialism, which is why the S and the G are more important than the E and I prefer engage- ment to exclusion. If we try to ensure that corporates across the world are well gov- erned then they are likely to be environ- mentally and socially conscious. Something that worries me is that we have to take great care of the working peo- ple who are displaced as we go along our ESG journey. The level to which those people can be replaced once displaced is going to vary from country to country. We have to be careful not to bonfire these people in the interests of ESG colonialism and make sure they are repurposed at the same pace as we improve the E and the G. Gill: A few years back sustainability was all about trying to find a low carbon version of what you were already invested in, which was seen as a quick win in looking more sustainable. Now we are more focused on the transition to a low carbon world.
I have been involved in a number of endowments which were under pressure to
be fossil fuel-free. One particular
You can get good emerg- ing market exposure through developed mar- ket companies.
Alasdair Gill, XPS Pensions
investment committee were vexed about this because they believed this was not the optimal route, as they believed in a more nuanced transition away from these com- panies, just “washing your hands” of fos- sil fuel companies. Yet the university told them to do this, so they had to do it. We are all learning and the industry is moving on to understand that the transi- tion is more important. We need to edu- cate trustees to understand the best way to achieve this and that looking for “quick wins” is not always the best approach. Mead: That is challenging for investors. The backward looking data, where availa- ble, is easily interpreted to justify the nuance of a forward-looking momentum of an ESG portfolio.
It is a tricky conversation to say that if you do not want that exposure today, then you can have this great portfolio. Looking for-
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