Many investors are aware of the limitations in terms of transparency and standard of corporate accounts of companies in emerging markets (EM).This goes for the reliability of ESG related data too. If companies in developed markets are often discovered to be “greenwashing”, what can we say about EM companies?
Whilst many EM companies may try to follow ESG standards set for companies in Europe or the UK. However, the cultural and regulatory environment may be different from the western world. Standards like labour laws and anti-corruption measures may be different from those in developed countries. Investors and their advisers have (rightly) been asking questions on why China, for example, is so dominant in some ESG indices (see table below for some examples). They also question whether ESG funds on Chinese equities and bonds are more a hype, dressing up a fund to give unsure ESG investors a reason to invest in China.
Source: MSCI
But perhaps we should consider another perspective. We should remind ourselves that our views on ESG standards for EM companies are often formed by the same ESG lens that we use in looking at companies in developed markets.
It is true that many corporate practices, accounting standards, laws and regulations in EM are different from those in developed countries. But within the EM world and within each EM country, there are still companies doing better on a relative basis than others.
Many ESG investors are investing for the long term and with a purpose. Investing in EM is itself compliant with the S in ESG by potentially helping to raise the living standards of poorer people. By supporting companies with better ESG standards relatively inside EM, we can help to create an even greater impact. We are telling management in EM companies that they can attract more investors, both foreign and domestic, by being best in class in ESG standards. We encourage them to keep improving on the ESG front, even though they may not be at the same level as the developed world. But we need companies even in the EM to follow some ESG principles in running their businesses. This will only benefit the society, investors, and other stakeholders in the long run.
There should be a case for ESG investment in the EM after all. So don’t rule them out. Instead, look for investment managers who can do a good job in identifying and engaging these EM companies.
James Chu CFA
Head of Investment Solutions
(This blog is an extract from the ESG investment section of the December edition of Tricio’s Monthly Insights. Please contact us at info@tricio-advisors.com if you want to see a copy of the publication.)