How to lower the risks of Emerging Market investment
Engagement is a powerful tool for EM investors to proactively manage ESG risk and protect or enhance the value of their investments. At the heart of our responsible investment strategy is the ongoing drive to engage with the companies and the industries we have chosen to invest in. We believe this is the duty of active investors.
Our approach of regularly engaging with companies on material risk allows those in developing regions to improve their way of doing business to meet investor standards. This way they gain investment, and the ESG benefits are all positive.
NAM’s Responsible Investments Team proactively screens out companies with poor environmental records, those that don’t look after their workforce, and those in which management structures and oversight don’t meet high standards. We also have restrictions around weapons manufacturers, oil sands and coal extractors.
But we are also aware that in different cultures, with different legal frameworks, we can’t necessarily expect business practices to be in place that are identical to those in DM. In EM, there is often little disclosure in relation to material ESG risks. Therefore, before we buy a company, we need to meet, preferably face-toface, and ask questions.
Therefore, we seize many opportunities to actively engage with companies to bring about beneficial change. At NAM, our engagement efforts include working with companies to improve disclosures.
Encouragingly, we are seeing improvements in ESG disclosure. For example, Hong Kong Stock Exchange, one of Asia’s major stock exchanges, is in the process of making ESG disclosure of material issues a responsibility of boards – not just a simple box ticking exercise. In addition, insurance giant Ping An, with whom we have engaged, is building an ESG scoring system, which it will not only use itself, but will also make available to other Chinese investors. We have also worked with Ping An to address challenges around data privacy and quality control after our team identified these as core risks to the company.
Emerging Markets represent an exciting opportunity for us as we search for companies that can become ESG STARS in the future. When we identify companies that demonstrate potential, we work with them to examine areas where their ESG credentials can be improved and brought up to standard. This way they gain investment, and the ESG benefits are positive for portfolios. It’s a true win-win.