Expert: Simon Henry (Wellington Management) Facilitator: Shireen Tyagi (Senior Manager, Consulting, KPMG)
Headlines:
- The prominence of thematic investing and the focus on social factors or the ‘S’ component as it relates to ESG is rising
- With rapidly changing macroeconomic and geopolitical conditions, there are major transformative shifts occurring in thematic investing for emerging markets
- When evaluating a potential emerging market investment follow the 3 Ps: Policy, Profitability, and Purity
- In Emerging Markets there is more of a focus on the ‘S’ of ESG than in some other markets. We need to consider how factors such as inclusion, diversity, and financial mobility are being included within our Emerging Market Development investment strategy
- There is a real focus on innovation in Emerging Markets which are experiencing a surge of innovation right now, accelerated by the Covid pandemic
Context:
Key thematic topics discussed during the session included financial autonomy in emerging markets, social empowerment through access to education, and the power of micro-finance to small businesses in emerging markets.
Simon Henry explained how these key attributes of societal development are underrepresented in many traditional emerging market strategies and benchmarks, and how a thematic approach to investing in emerging markets provides the opportunity to invest in the future winners of development.
Simon stressed the vital importance of having grass roots research in every market, leveraging Wellington’s deep and global research capability.
When evaluating a potential emerging market investment, Simon explained the importance of the 3 Ps:
- Policy: The necessity of strong policy support for investment themes and an understanding of how policy is evolving.
- Profitability: How does policy then impact profitability of businesses, and is it supporting growth?
- Purity: Does the company show purity to the theme itself?
In Emerging Markets there is more of a focus on the ‘S’ of ESG than in some other markets. We need to consider how factors such as inclusion, diversity, and financial mobility are being included within our Emerging Market Development investment strategy.
How to identify sustainable innovation within emerging markets
There is a real focus on innovation in Emerging Markets and they are experiencing a surge of innovation right now, accelerated by the Covid pandemic. Emerging markets are a hot bed for ‘leapfrogging’ when it comes to technology – bypassing traditional stages of development to either jump directly to the latest technologies or explore an alternative path of development using new or emerging technologies.
We see this across sectors, for example in energy (with high tech floating solar panels and solar homes in Rwanda and Bangladesh), healthcare (in the rise of online GPs) and telecom (with digital payments through phones).
For more systematic investors – driven by data, signals, vigorous testing and science – market insights can be hard to come by given the complexity of developing markets. Specifically, it is difficult to account for how innovative technologies are leading to impact and solving for ESG issues.
Overcoming the lack of data in your decision making and strategy can be difficult, and we therefore believe fundamental analysis is incredibly important. Emerging Market Analysts need to continuously work with Wellingtons global industry analysts per market to understand key drivers as fully as possible.
The SASB standards (Sustainability Accounting Standards Board) can be used as part of an engagement strategy with companies, to highlight ESG risks for different industries and corresponding standards.
Climate and the disproportionate risks in developing countries and the prospects for investment when it comes to climate adaption
With COP27 just behind us – this year there was a strong global push for climate finance to help fill the funding gap for climate mitigation and adaptation projects in developing regions. Emerging markets will be disproportionately affected by climate change, as our work with Woodwell Climate Research Centre has helped quantify, and there are opportunities within emerging markets to invest in solutions that benefit from, and help drive, the transition to a sustainable future.
Key takeaways:
A “climate-first” approach from an investing perspective, according to Simon Henry, encompasses:
- Clear alignment with the climate / sustainability theme
- Exclusions of certain industries that are hindering the climate transition (i.e., fossil fuel / coal mining supply chains)
- Taking a bottom-up perspective, driven by deep understanding and fundamental research
- Deliberate portfolio construction and assessing the portfolio’s climate characteristics overall
