Global emerging markets roundtable
ward is a much more important journey, but it is hard to quantify and you need to have a conversation with clients to edu- cate them about this. Gill: I have had clients who understand that but want to go down a different route. Ultimately, trustees make their own deci- sions, but there can be difficult conversa- tions about how to grapple with this. It is not easy. Treich: The quality of engagement is improving. We are more flexible and less likely to impose a view which is not appropriate to the situation at hand. If you share best practice around govern- ance or labour relations, the more for- ward looking companies in emerging economies are receptive to having that conversation and following through on it. Engagement is difficult to look at, but we provide specific examples each quarter on companies in specific countries, showing how the manager engaged and what the response was. That will get better, but it will take time. Inderst: Do ESG indices help in emerging markets? We did some work with the World Bank on ESG ratings
in fixed
income. Everyone was enthusiastic that this could mobilise institutional capital into emerging markets, but it has almost had the reverse effect. Traditional static sovereign ESG rankings simply rank the most developed nations, such as the Nor- dics or Switzerland, highest. You need to have a dynamic approach that takes, actual and potential, improvements in governance, environmental, climate and social factors, such as human rights, into account. Smith: The MSCI EM ESG Leaders index has outperformed the underlying index, which is not the case for developed markets.
These ESG indices are broad and more directional. But you have to wonder if the scores are right; two providers can score the same company completely differently so there is often little correlation. There is a reliance on providing discretion to fund
Emerging markets is an area of high growth potential and high uncertainty, so it lends itself better to diversifi- cation to capture the opportunity.
Ian Smith, Newton Investment Management
ing every value manager must value every company the same way and reach the same conclusion. They can look at the same value metrics but come to a differ- ent conclusion because they have weighted similar metrics differently. That is the same with the data providers. What does not help is that they may use a AAA to CCC scoring system, which are similar to bond ratings, which tend to have a relatively high correlation. The fact that ESG ratings are different does not matter, in my opinion. You need to figure out what they are ranking within their company assessments.
managers in terms of deciding where the company is going or affecting change through encouraging a transition. For underlying clients, you are asking for something that is qualitative and that is a challenge for the industry. How do the base capital allocators get comfortable with providing that discretion to invest in the right way and promote change without having the backward data to corroborate it? It is the same debate and trade-offs when you ask the question of how important indices are. To some extent it is a question of a smart beta solution, supported by a lot of back- ward-looking, and at times questionable data, versus providing fundamental investors with discretion and watching them like a hawk, and asking them lots of questions around what they are doing. That is the basis of how we get comfortable. Shihn: The correlation among rating pro- viders is talked about a lot more than it is relevant. It does not really matter. If you look at the metrics the data provid- ers use, they are relatively similar. What differs is the order they rank those met- rics in and the weights they ascribe to them in their assessments. To say that ESG rating providers should come to the same conclusion on a company is like say-
These ratings can be good data points for active fund managers to analyse a company. Active stock pickers need to take qualitative views and understand the businesses they are investing in. Different data providers arriving at differ- ent conclusions on the same company matters less than is discussed. What mat- ters more when looking across the global universe of companies is that most of them take the same, internally consistent, approach to every country in the world. Regardless of jurisdiction, the qualitative approach they are taking is consistent from market to market.
Emerging markets are not consistent in their capital and governance structures. There are also a lot more state-owned enterprises and more owner-operated companies than in the developed world. So, taking a single developed market- based view of the world and applying it to every emerging market is not going to give you the right result, which is why you need qualitative analysis to look at these data providers and their views on differ- ent securities.
This is why active managers can be more value additive in emerging markets than perhaps in developed markets when using ESG metrics and scores.
Rob, would you go passive in these markets? Treich: Preferably not. That is not to say
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