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Fresh thinking on the importance of ESG issues in emerging markets is developing. Geoffrey Wong, Head of Emerging Markets and Asia Pacific Equities discusses the way the most attractively valued companies are selected.
How do you and your team approach the sustainable investment topic within emerging markets?
Sustainable investing in emerging markets is gaining momentum. It was previously pursued mostly in developed markets, but it has become a growing theme in developing economies.
Across our equity platform, we integrate ESG in our fundamental research, which begins with each of our equity analysts. In our team, we believe sustainability and a proper consideration of ESG factors needs to go beyond a simple check-the-box exercise.
Our equity analysts are best placed to be at the center of ESG integration in active equity strategies, due to their in-depth knowledge of companies and experience in fundamental analysis. They are able to do this because of our boots-on-the-ground unconventional research on industries and companies, and our proprietary quality assessment tool.
Accurate and/or complete ESG information is sometimes hard to find in emerging markets, hence we believe that there is no viable substitute for the boots-on-the-ground research that we do, wherein we meet not only with company representatives but also with their competitors, suppliers, customers and industry experts amongst others. This helps us gain a better picture of the company and its management, along with specific ESG issues. For example, when traveling to rural areas or smaller cities, our analysts might simply walk in and have a tea or coffee with the bank branch managers, distributor/dealers and farmers to better understand the various issues regarding the industry or company as well as company management including ESG concerns.
We believe our analysts have the skillset to place sustainability issues in the right context, thereby allowing them to produce a more holistic picture to understand a company's long-term sustainability, compared to internal and external databases.
We believe sustainability and a proper consideration of ESG factors needs to go beyond a simple check-the-box exercise.
Do you go beyond considering ESG in your investments?
Yes, we also have well-defined engagement and proxy voting procedures which is the second step of how we integrate ESG across active equities.
Our quality assessment and investment processes have developed over the years to help us with using our ESG insights to influence corporate behavior and decisions in the companies we interact with.
Since 2012, we have been incorporating an explicit ESG checklist in our quality assessment and have continued to expand and develop this section over the past few years.
More recently, and with the help of our dedicated Sustainable Investing (SI) team, we have developed a proprietary ESG Risk Dashboard that incorporates information and insights from several external ESG databases. Now, potential ESG flags are automatically raised and the likelihood for company engagement is discussed with the SI team.
Our investment teams are supported by a dedicated team of 10 SI research and stewardship analysts with specific ESG expertise and they typically get involved with more complex ESG engagements.
While we use external information and consult with the SI team, the final interpretation of the information lays with the investment team.
Engagement and proxy voting are intrinsic parts of our investment process and overall approach to stewardship. As we have outlined in our Global Stewardship Statement, our approach comprises activities which monitor and, where necessary, influence corporate conduct on matters that affect the long-term value of investee companies.
Our equity analysts seek to build relationships with company management to foster regular healthy dialogue and enhance performance on a variety of ESG issues such as strategy, performance, business ethics, corporate governance, climate change, human capital and supply chain management.
Thus the integration of ESG issues is not limited to assessing how these dimensions impact financial valuations and the investment thesis. On several occasions, this analysis allows financial analysts to identify key ESG risks and opportunities to discuss with corporate management in order to unlock long term value. How the dialogue progresses will then inevitably influence how we view the company from a financial perspective.
Apart from your proprietary research, do you also apply established global standards?
ÃÛ¶¹ÊÓƵ Asset Management became a signatory to the United Nations Principles for Responsible Investment in April 2009. We remain supportive of the principles and review areas of improvement that may be required following each reporting assessment.
Building ESG into our investment process
Equity analysts evaluate proprietary findings and the signals generated by the ESG Risk Dashboard by focusing on material ESG issues and evaluating impact on the investment thesis.
In-house ESG recommendation from the SI analyst team includes specific evaluation of engagement potential.
Strategy committee ultimately weigh ESG profile and consider either the potential for improvement through engagement or not investing in the company.