Investment company managers talk about their ESG approaches.
Whilst nations around the world have adopted net zero commitments, there is still much debate about how to balance growth and sustainability in emerging markets.
Ahead of the UN Climate Change Conference (COP26) in Glasgow in November, the Association of Investment Companies (AIC) has spoken to emerging markets managers to discover their approach to sustainability and ESG, the themes that most excite them, and how they engage with portfolio companies.
Balancing growth and sustainability in emerging markets
Emily Fletcher, Co-Manager of BlackRock Frontiers Investment Trust, said: “We feel strongly that the world cannot craft a path to net zero emissions without emerging and frontier markets playing a pivotal role. While the stage of economic development in some cases presents challenges, we do not view sustainability and economic growth as incompatible ambitions. For many of the companies in our investible universe, addressing climate risk embedded in their business is new. This presents an opportunity for fundamental investors with a deep understanding of these companies’ business models. In our view, both public equity and other forms of capital have a key role to play in incentivising and supporting companies through this crucial transition.”
Usman Ali, Partner and Head of ESG and Engagement at Mobius Investment Trust, said: “While there will inevitably be a negative short-term impact on sectors such as fossil fuels, there are tremendous long-term opportunities across emerging markets within sectors such as renewable energy as well as other new and innovative environmental technologies. For such sectors, patient capital is required. Transforming and establishing new energy projects can take between five to ten years. Accordingly, investors must have a long-term horizon.
“It is also important for sustainable growth to impact the real economy. Being underweight or overweight in a sector such as fossil fuels will not necessarily translate into a real-world impact. Investors must critically use data and assess the true impact of their portfolio companies rather than through the limited lens of how the portfolio compares to the MSCI Emerging Markets Index.”
Most exciting sustainable themes
Andrew Ness, Portfolio Manager of Templeton Emerging Markets Investment Trust, said: “Electric vehicle (EV) battery manufacturers, which are concentrated in Asia, are at the forefront of innovation, enabling the EV mass market to take off. LG Corp, for instance, which Templeton Emerging Markets Investment Trust invests in, has amongst its subsidiaries Korea's largest EV battery manufacturer. It used to be considered an old chemical industry company, but now it has a 25% share of the EV battery market. Its clients include Tesla, Ford, Daimler and Volkswagen. It is the sole battery supplier of EV and hybrid cars. It strengthened its battery stability by improving the battery’s durability and heat resistance through a nano ceramic coating technology. LG Corp consequently has a number of advantages that offer the potential for an investor in emerging markets to tap into the long-term structural theme of EV production.”
Emily Fletcher, Co-Manager of BlackRock Frontiers Investment Trust, said: “Frontier markets are home to three billion of the world’s poorest people. We believe that companies which are run to take into account all stakeholder interests can have a substantial impact in driving economic growth in the countries that we invest in. Given the stage of development and the proportion of people who are unbanked in this part of the world, financial inclusion continues to be a key theme as well. These countries are also home to large reserves of commodity resources, the responsible extraction of which is crucial to long-term sustainable value for many companies in our universe. We see direct and indirect investment implications of this shift. One example is the desire to diversify away from the dependence on hydrocarbon as the driver of economic growth for many Middle East countries, providing investment opportunities in other areas.”
Austin Forey, Portfolio Manager of JPMorgan Emerging Markets Investment Trust, said: “We consider sustainability in the broadest sense, and see positive attributes in companies across the breadth of the portfolio. For example, Taiwan Semiconductor Manufacturing Company, the world leading semiconductor foundry, was one of the first emerging market companies to include the cost of carbon emissions in their financial analysis when building new foundries. Over the last year, EPAM Systems displayed social strength, introducing masks for medical professionals designed by EPAM Continuum. And in India, Housing Development Finance Corporation showed itself to be a good corporate citizen by committing 1.5 billion rupees to the PM-Cares Fund to support the government for its relief and rehabilitation measures towards the COVID-19 pandemic.”
What are portfolio companies doing to reduce carbon emissions?
Usman Ali, Partner and Head of ESG and Engagement at Mobius Investment Trust, said: “We have engaged with every portfolio company on environmental issues. This includes the initiation of reporting in line with Global Reporting Initiative (GRI) and Task Force on Climate-Related Financial Disclosures (TCFD) standards. Our holdings have made substantial progress on this, and as of June 2021, 62% of our portfolio companies have environmental reporting in place.
“Some of our holdings have clear three- and five-year climate change targets in place. For example, in June 2021, Yum China announced their commitment to the Science Based Targets Initiative. Previously, in 2018, Yum China set clear targets to reduce energy consumption and GHG emissions across their restaurants by an additional 10% compared to their 2017 baseline. This target was met in 2020. A new climate change strategy has been established to reduce energy, improve green building design and reduce water usage.”
Austin Forey, Portfolio Manager of JPMorgan Emerging Markets Investment Trust, said: “Investing sustainably has always been an integral part of our research and investment approach, well before ESG factors became mainstream. We don’t hold, for example, energy stocks and miners, and haven’t for a long time. The trust’s portfolio naturally tilts towards industries with a significantly better-than-average carbon footprint, to use a common environmental yardstick. In fact, the carbon emissions of the trust’s investments amount to a mere one twentieth of that of the MSCI Emerging Markets Index. So, for every $1 million of investment in our portfolio, 8.2 tonnes of carbon emissions are generated per year. If you bought an ETF passively tracking the emerging market equity index, the same million dollars invested would produce 225 tonnes.”
ESG in emerging markets versus developed markets
Emily Fletcher, Co-Manager of BlackRock Frontiers Investment Trust, said: “Emerging and frontier markets are at a different point in their ESG journey than developed markets. We believe that the variability in quality and disclosure of ESG information in these markets requires an active investment approach in evaluating this data. The challenges with data quality and availability mean that we cannot solely rely on third-party providers and instead need to conduct our own proprietary ESG research as part of our fundamental bottom-up company research process. Societal values and concepts are not always consistent between developed and emerging/frontier markets, which necessitates a nuanced approach to ESG assessment and engagement.”
Usman Ali, Partner and Head of ESG and Engagement at Mobius Investment Trust, said: “There is no one-size-fits-all when it comes to ESG in emerging markets. Each country and sector is confronted with unique ESG challenges and opportunities. What is considered to be good practice in Brazil may not work in Taiwan. Executive compensation is a good example of this where regulations on stock options vary significantly across the world.
“Emerging and frontier market countries are also among the most exposed to the impacts of climate change, as well as local pollution and resource scarcity issues. These challenges are likely to intensify in the coming years. As incomes rise in emerging and frontier markets, the demand for resources continues to intensify. The UN expects the world’s population to rise from 7.7 billion to 9.8 billion by 2050, with the majority of the increase taking place in the world’s poorest countries. In just the next fifteen years, McKinsey & Co expects that global demand for primary energy, food and water will increase by 25% to 40%. The World Economic Forum’s 2021 Global Risks Report cited extreme weather and natural disasters as key risks the world faces over the next 10 years, with many emerging and frontier markets among the most vulnerable.”
Andrew Ness, Portfolio Manager of Templeton Emerging Markets Investment Trust, said: “Innovation is at the cornerstone of emerging markets today. Companies in these markets are innovating faster and to a more successful extent than their developed market peers. We are seeing agile companies adjusting their business models to adapt to the changing world.”
Engaging with companies
Austin Forey, Portfolio Manager of JPMorgan Emerging Markets Investment Trust, said: “We regularly challenge companies on issues that are specific to what they do. For example, we recently engaged with a pharmacy company to discuss its use of inappropriate third-party advertising from a product manufacturer, to understand how a mistake had been made, what had been done about it and what steps had been taken to make sure this wouldn’t happen again in the future.”
Usman Ali, Partner and Head of ESG and Engagement at Mobius Investment Trust, said: “We have been engaging with APL Apollo in India on governance factors since we invested in 2019. This included changing the auditor and appointing a newly created role of Chief Strategy Officer. As governance factors improved over time, we shifted our focus to board diversity and sustainability reporting. While our engagement has already shown positive results with this company, we continue to push gender diversity at the board level and encourage all our portfolio companies to adopt Global Reporting Initiative (GRI) and Task Force on Climate-Related Financial Disclosures (TCFD) reporting standards.”
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Notes to editors
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 364 members and the industry has total assets of approximately £259 billion.
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