We are seeing increasing levels of adoption and awareness of ESG factors by companies, governments and shareholders in Emerging Markets (EM). In our view, this is materially positive for investors with a long-term ownership approach such as ourselves. We also believe it can be a significant value driver for individual business and investment performance.
ESG momentum in Emerging Markets
Disclosure and ESG reporting are gathering pace
Over the past decade, we have witnessed an increasing number of EM stock exchanges and regulatory bodies requiring disclosure as part of their listing rules.
We believe ESG factors can be a major driver of value for EM companies and equities.
18 countries across EM are now Sustainable Stock Exchange (SSE) partners1, including most of the largest markets such as China, Brazil, Korea, India and Russia. The majority of these markets also now have some form of written guidance on how to approach ESG reporting. Tellingly, this is not the case for the NYSE which is also an SSE partner.
In addition, as ESG becomes more embedded, reporting on ESG is, in fact, becoming a mandatory requirement under some listing rules – this is now the case for Brazil, Hong Kong (which includes listing for many Chinese companies), India, Malaysia and South Africa among others. Notably, later this year, the China Securities Regulatory Commission will introduce a new requirement for all listed companies to disclose ESG risks associated with their operations.
Numbers of stewardship codes are increasing
We are also seeing greater expectations placed on investors’ stewardship activities and this is manifesting itself with the development of stewardship codes.
Engagement: mutually beneficial outcomes
In terms of engagement, we have seen a tangible shift in the willingness of EM companies to engage and build an understanding of what investors want.
Our tenure and long-term relations with many of the companies that we are investing in means that they fully understand the approach that we take.
Increasingly, the insights we have gained from our longstanding focus on engagement have attracted the attention of other companies. Every year, EM firms contact us for advice on how to approach a range of issues such as disclosure, climate reporting and remuneration.
Essentially, we think of ourselves as ‘owners’ of the businesses that we invest in, rather than merely ‘renters’ of companies' shares. As such, we approach engagement as a partner, helping to guide companies towards the kind of governance and operating best practice that will enable sustainable long-term returns.
This is ultimately a win-win for both the companies themselves, as well as the actual providers of capital for these businesses – our clients.
ESG in EM driving performance
We believe ESG factors can be a major driver of value for EM companies and equities. What’s more, it’s the rapid rate of change in ESG adoption in EM which can act as a potential source of alpha and can be a driver of significant investment out-performance over the long term.
However, capturing this performance requires a research-driven, active management focus with ESG analysis fully integrated into the investment process. In our experience, a fundamental part of this approach centres around the nature, level and longevity of engagement.