ESG Integration – Emerging Markets

It is increasingly recognised that it is exceptionally important to invest responsibly and for corporates to operate in a more sustainable manner, taking into account the needs of the environment and society as well as their traditional stakeholders. Historically, Emerging Markets have been considered lagging in the implementation of high ESG standards. Whilst that is still true to certain extent, as globalisation has accelerated, so too has the quality of ESG transparency and compliance in the Emerging World. This has been driven not only at the corporate level, by increasingly internationally trained executives, who bring their own industry into line with global standards, whilst adding their own local characteristics, but also by the growth of the global supply chain, which has demanded ever more exacting standards of governance and environmental awareness. Thus we often find companies operating to global qualities of due diligence and responsibility in countries whose wider ESG compliance may be more lacking. Therefore, when it comes to assessing ESG standards, we take a bottom-up approach.

When assessing and monitoring potential investments, we use a variety of templates, specific to each sector, which combine both traditional financial and non-financial measures of analysis. The ESG section of our analysis is designed to provide us with an overview of management’s attitude and actions geared towards improving its ESG standards. We have created our own templates which incorporate data from vendors such as Bloomberg with information resulting from our own due diligence on companies in meetings and wider research. We have found that the materiality for each sector varies widely and use are guided by the SASB materiality map in this process (https://materiality.sasb.org/). 

We combine both types of templates when it comes to assess a company’s overall ESG profile and integrate this into our final investment decision.

Environment: We do not use “negative screening”, as this has proven both controversial and problematic, although we have never invested in tobacco companies, as they have always been vulnerable to litigation. Instead, we try to think about whether the way in which a company treats the environment will cause a problem for it in the foreseeable future. We do not want to buy companies likely to be fined for polluting their environment, or ones whose products might be banned or taxed excessively in future, so we check for problems which similar companies have experienced in the past in each sector. We do buy companies in sectors such as chemicals and materials, because without them there would be no medicines, or solar panels, but we limit our holdings to ones whose management are seeking to improve their environmental performance and whose footprint is generally better than their local peers. We are keen to hold companies whose products actively improve the environment – but not at any price.

Social: In social aspects, we believe that a company which abuses its workforce and the community around it will be vulnerable to increased regulation, fines and customer boycotts, so we look for companies with a growing awareness of this as part of our general assessment of management and expertise. We check for issues which are specific to each sector, such as suppliers’ abuse of the workforce in the retail sector, or customer data protection issues in the financial services sector.

Governance: We believe that well-run companies last longer. They generally stand the test of recessions and have more stable share prices, so it has always made sense to pay attention to how our investee companies are governed and controlled. The quality of governance is not the same in all countries, so we look for evidence of an intention to improve, rather than companies which are already ideal. Many companies in Emerging Markets have traditionally been run by their founders and their families, which has often created complex conglomerates, which duplicate costs and lose alignment with their smaller shareholders. Increasing awareness of the importance of better governance is leading these founding families and regulators to seek better protection for minority shareholders and as international investors, we engage in dialogue with the senior management of our investee companies to scrutinise that journey. Emerging countries’ governments are traditionally more “hands-on” than Western ones, so we also try to avoid companies which risk being asked to do irrational “national service”.