Long-term trends in EM: a growing focus on ESG
Daniel Graña, Matthew Culley and Matt Doody explain why environmental, social and governance (ESG) factors are becoming increasingly important in the analysis of emerging market (EM) companies.
- In our view, governance takes precedence when assessing ESG factors in emerging markets because the legal operating environment in which companies operate is such a critical factor.
- We are seeing many EM companies starting to view ESG issues not as costs to be mitigated but as opportunities to be maximized.
- Through active engagement with companies, we seek to ensure that their ESG practices are strong and/or that the direction of travel is profoundly positive.
Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
Daniel Graña: ESG is not only becoming more important, but I would argue is it is only going to become more important going forward. We actually call it “GES” – governance first, actually, and then the E and the S, environmental and social. Because in emerging markets, governance, in terms of how minority shareholders are treated by controlling shareholders, but also the political governance, the kind of legal operating environment the companies swim in, are also very important. Those act as a gatekeeper. If we don’t get comfortable with the governance that the company is operating in, we won’t invest at all. The “E” and the “S” are emerging themes in emerging markets. We see those today as opportunities to invest in. The information and the data – the analysis – is not always there to sort of distinguish the better players and the worse players in the E and the S metric. But we certainly can get excited about companies that are providing positive impact on the environmental side and positive impact on the societal side. GES, as we call it, is an important part of what we do at Janus Henderson.
Matthew Culley: We are seeing a lot of EM listed companies that do have strong ESG characteristics. Now, beyond just some of the really exciting stories around inclusion and decarbonization that we talk a lot about, many of the outsourcing and convergence stories are also starting to develop these. So in India, we are seeing beverages manufacturers that are not only starting to achieve a water-positive balance but are actually recycling substantially all of the plastic that they use for their products. In China, we are seeing restaurant companies using the digital initiatives that they have on the consumer side to be able to revolutionize their supply chains. They are able to not only improve their biosecurity, but also reduce their environmental footprint via things like deforestation. And so I think what is particularly exciting for both of these examples is that they actually reduced cost in the process of it. So many of our companies are now starting to look at ESG issues, not as a cost to be mitigated but actually as an opportunity to be maximized.
Matt Doody: As long-term investors, we look to continually meet with and engage with the companies that we invest behind to make sure that their ESG practices are strong and/or that the direction of travel is profoundly positive.
In addition to active engagement with our companies surrounding their ESG strategies, we also employ a number of ESG tools, including company proxies and ESG-related risk reports. We also cast our network a little bit wider and use industry experts and surveys where relevant. Additionally, we also leverage the broader Janus Henderson organization in our colleagues on the Central Research Team and our Global Responsible Investing Team.