There is compelling evidence that ESG factors influence returns over the longer term.
We use our sustainability framework to assess awareness, exposure and management of external risk factors. These include supply chain risks, environmental risks, regulatory risks and societal risks. As with governance research, we perform this analysis on every company we research and distil our findings into a numerical score to reflect our conclusion on business sustainability.
Importantly, we appreciate that companies are on a journey when it comes to ESG performance, so a firm that falls short of our expectations will not automatically be ruled out if we can see potential and a willingness to improve.
Martin Currie governance and sustainability scorecards
Engagement and Voting
Engagement and voting are two areas where we can make the biggest difference as active investors. Engagement allows us to improve our understanding of the opportunities and challenges companies face as well how management are adapting to these. Ultimately this leads to our investment decisions and voting decisions being better informed.
In our experience, there is a clear appetite for engagement and learning by emerging market companies. We leverage our extensive experience and understanding of ESG matters to help companies deliver improved outcomes from engagement. Our input is increasingly recognised by companies and we are regularly approached to provide input and support to improvement initiatives. Active ownership, through our engagement and voting, is a key element of how we discharge our stewardship duties on behalf of our clients.
ESG in Emerging Markets
Emerging markets have made great strides when it comes to ESG over the years and there is now a constellation of companies which can go head to head with their developed market peers. Indeed, recent research has underscored that emerging markets have caught up with developed ones when it comes to environmental and social performance, even if differences remain in terms of governance metrics. Investors should be cognizant of different ownership dynamics – government ownership is more prevalent, and while this may not be a problem, understanding the motivations and stakeholder alignment in such cases is important. Equally, family ownership is more common than in developed markets, but as studies have shown, investing alongside family owners can be a very beneficial long-term strategy.
Case Study: Naspers/Prosus
Naspers is a South African internet company that invests in some of the leading technology companies in the world. We have held the company in our Global Emerging Markets portfolios for several years and have voted against their remuneration policy proposals at recent Annual General Meetings. Due to the consistency of our actions and our written and verbal engagements over our holding period, the group’s Chief People Officer requested the opportunity to visit us in person to further discuss our objections and relay our feedback to the remuneration committee.
Following our dialogue, we are pleased to note that Naspers have made a number of improvements in their approach to management remuneration including a greater linkage between performance and outcomes, the introduction of clawbacks on incentives, a commitment to reduce associated minority shareholder dilution and vastly improved disclosure. Their disclosure extends not only to their annual remuneration report but also to a dedicated section of their website where the Chairperson of the HR & Remuneration Committee explains the key facets of award design and implementation.
Despite these positive changes, we believe further improvements can still be made and we continue to engage with the company on remuneration alongside the other aspects of governance and sustainability where we see opportunity for better alignment.
Leading the way
We observe a wide range of approaches to ESG both at a company level and between countries, and in a number of areas emerging markets lead by example. For instance, in South Africa the adoption of the 'King Report on Corporate Governance' has led to some of the best integrated reporting anywhere in the world, communicating a clear holistic approach to strategy, planning and how companies’ resources are used to create value. We are seeing growing adoption of integrated reporting in other emerging markets and many companies are reporting how their activities align with the UN’s Sustainable Development Goals (SDGs).
Our work also shows another area where emerging markets differ from US norms is on board structure. Here, emerging market companies generally have better age diversity and shorter-tenured directors. There is also far less controversy around executive compensation, due to the relatively modest pay packages typically offered to emerging market executives. While incentive schemes still require scrutiny, our focus tends to be on ownership structures and board composition.
Following our dialogue...Naspers have made a number of improvements...
When it comes to environmental issues, government policy will often play a role. Here it is important to highlight that many emerging market countries have reaffirmed their commitment to the Paris Agreement on climate change, following the US’s decision to leave. There is also progress amongst asset owners, as witnessed when four emerging market based sovereign wealth funds joined forces with two developed market funds to create the One Planet Sovereign Wealth Fund Framework. This partnership aims to accelerate the integration of climate change issues into the management of these large, long-term asset pools.
The appetite for engagement and learning shown by emerging market companies is often stronger than that exhibited by their developed market counterparts. They are also genuinely willing to listen and respond to investor input, a feature that enhances the influence we can have as stewards of our clients’ assets.
Room for Improvement
Whilst most companies in emerging markets recognise the importance of ESG, there is still much that can be done to meet the expectations of asset owners. Rather than poor underlying practice, it is often simply a matter of disclosure, with management lacking an awareness of the importance investors attach to these factors.
We are seeing signs of progress on disclosure with initiatives such the Task Force on Climate-related Financial Disclosure and SDGs bringing better consistency. We are also pleased to see the development of scenario analysis tools, with the Transition Pathway Initiative and the Paris Agreement Capital Transition Assessment both gaining traction.
The appetite for engagement and learning shown by emerging market companies is often stronger than that exhibited by their developed market counterparts.
Case Study: Credicorp
Credicorp is another example of a successful, longterm holding where we have an extensive history of constructive engagement with management. It is Peru’s leading financial group with 30–40% market share in the key product areas of wholesale and consumer banking. It has a long history of sustainable growth and strong capital returns, which we expect to be maintained over the coming years as the Peruvian banking system is deeply underpenetrated.
The key sustainability risks identified at the time of our initial investment in 2011, were weak environmental risk management in corporate banking and undefined responsible lending practices in retail lending. Most recently, our engagement has been focused around the level of technological expertise within senior management and the board of directors, as well as the sustainable management of their microfinance business.
These areas are relevant as banks are increasingly held responsible for the social and environmental impact of their lending decisions. There are reputational and legal risks to be managed and these are especially high in countries with lessdeveloped governance frameworks such as Peru. Going forward, banks must increasingly adapt to remain relevant to their clients as the prevalence of digital technology brings opportunities but also threats around business model disruption.
Initially we introduced senior management to best banking practice in other markets where we have strong relationships with leading banks, for example in South Africa. This led to a group sustainability review and a benchmarking exercise – the outcome of which was Credicorp’s adoption of the Equator Principles (January 2013), a global framework for managing environmental and social risk in project financing. Additionally, Credicorp published its Stakeholders Relations Policy (October 2014) which commits the bank to promote a client-based culture inside the bank, recognising the risks of mis-selling to an unsophisticated customer base.
We continue to introduce Credicorp to other respected companies in relevant business areas; most recently an Indonesian bank with a world-leading microfinance business. Our intention is for these businesses to benefit from sharing best practices in areas such as data security, customer lending practices and digital technology with the aim of building more sustainable businesses.
As part of our engagement on Credicorp’s technological expertise, our recent visit to their headquarters in Peru enabled us to meet not only senior management but teams working on the ‘transformation’ initiative that should position the bank for the ever-increasing digitalisation of banking. We continue to engage on this topic and track their progress. Credicorp’s receptiveness to our feedback and clear willingness to improve its ESG credentials, has been central to our strong conviction in its prospects.
...our recent visit to their headquarters in Peru enabled us to meet not only senior management but teams working on the ‘transformation’ initiative...
Martin Currie and ESG at a glance
The concept of stewardship is at the heart of our philosophy as active equity specialists, and ESG is a critical component of this, informing our research and engagement efforts. Analysis of these factors has been embedded in our emerging market team’s stock research process since the inception of the strategy. As a firm we routinely engage with businesses to improve awareness of sustainable business practices and to effect change. While most of our engagement takes place in private, we often join up with other investors when we deem this to be more impactful than acting alone. Recent examples of the latter include engagements on water risks in the agricultural supply chain, labour practices in the food retail sector, and cybersecurity.
As signatories to the Principles for Responsible Investment (PRI) we have committed to report on our activities in relation to responsible investing each year. We have consistently been highly rated by the PRI in their annual assessments and in 2019, for the third year running, achieved the highest possible rating (A+) in all top-level categories: ‘strategy and governance’, ‘incorporation’ and ‘active ownership’. We have also received the highest ranking (Tier 1) by the Financial Reporting Council for our statement of compliance with the UK Stewardship Code. Importantly, we believe in holding ourselves to the same standards that we expect of others and live our values through the management of our own business. This includes participating in industry initiatives to raise the profile of ESG issues, as well as sharing ideas about best practice.