Why take a sustainable approach to investing in emerging market equities?
Simply because I think it’s the best way to generate returns and manage risk. Through a sustainable approach, investors can align portfolios with structural transformations taking place in emerging markets with the potential to drive growth and profits for select businesses. Also, companies that are run sustainably should be less exposed to regulatory sanctions, reputational damage, consumer opposition, talent loss and other threats to their long-term success.
What are the most important elements of an emerging equity sustainable investment strategy?
I think there are three. The first is a research process that can identify companies exposed to structural drivers linked to sustainability. This may not be obvious, particularly in emerging markets, where sustainability disclosure and regulation are at an earlier stage. We tackle this by having the same analyst do all aspects of the fundamental research into a company, including understanding sustainable growth opportunities, analysing externalities, measuring impact when appropriate, and prioritising areas for engagement.
The second is a means of assessing the value created by companies that works across most industries and regions. Analysis of economic value added is one of the tools we use for this, as the cost of equity varies wildly across emerging markets due to large differences in risk-free rates. Third, making progress on sustainability takes time and purposeful engagement with companies. A high-conviction, focused portfolio works best, in my view, because we can establish meaningful dialogues with management teams.
What’s driving sustainability-linked structural trends in emerging markets?
Emerging economies and societies are going through transformations that are faster and more extensive than those taking place in developed countries. A generation or less ago, large proportions of the populations in many emerging markets had no access to healthcare, education and financial services, and often limited access to clean water, electricity, transport and decent housing. Some are still in this position. Within a few decades, most emerging nations aspire to provide all of these things for all of their people, and to do so via a sustainable economic model fit for a net-zero, digital world. There are vast unmet needs in emerging markets, and hence very substantial opportunities for businesses across industries that can address them sustainably.
Why launch the Emerging Markets Sustainable Equity strategy now?
Investors wanting to access emerging markets equities via a sustainable approach still have very few options. One reason for this is that, for many people, sustainable investing used to mean stacking a portfolio with companies with high ESG scores – which excludes a lot of emerging market businesses simply because of where they operate from. Fortunately, this view is increasingly seen as outdated, not least because it rules out some of the companies with the most potential to benefit from sustainability trends.
The sustainable investment opportunity in emerging markets is enormous in my view, and it’s still largely untapped. But I always try to be very clear that, to invest sustainably in emerging markets, you have to be willing to hold companies that may be great businesses with generally strong sustainability credentials, but that may also have work to do on aspects of ESG to match the best companies in wealthier countries. Again, I think the key, from an investment perspective, is a research process designed to evaluate sustainability in the context of business fundamentals, and vice versa.
What led you to become interested in sustainable investing in emerging markets?
I was born in Sweden but I have Polish ancestry. Growing up, I regularly went to Warsaw to visit my relatives. Over two decades, I observed Poland develop from a Soviet satellite state to a modern economy which ultimately joined the European Union. The country went from food rationing, milk bars serving boiled potatoes with sour cream, and state-run consumer goods stores stocked with leftovers from the Soviet Union, to an economy which has seen uninterrupted economic growth since 1992, bar the COVID dip in 2020. The transformation was stupendous and inspired me to invest in other emerging markets which are yet to experience such economic success. However, going forward, economic growth needs to be achieved in a way that doesn't create a liability for future generations. I believe emerging markets development and sustainability are intrinsically linked.
General Risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific Risks. Geographic / Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease whilst more broadly-invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market. Emerging and Frontier market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
