Ian Burger (IB): Why do we focus on ESG [environmental, social and governance analysis] in emerging markets or in any market for that matter? It’s a focus on materiality – what can have an impact on the underlying investment case.
Rob Marshall-Lee (RML): What we are trying to achieve from the investment side is to make sure the value stays in the business. You can have the best business in the world, fantastic growth opportunity, really nice investment thesis, but ultimately if you’re not benefiting from that as a shareholder and the value is not staying in the business, then what is the point. What we see in emerging markets quite often is there is some key actor – be it an oligarch or a state owned entity – where they are misaligned with your interests; they are trying to take value out of the business in a way that makes sense to them. We like companies where they are making the capital-allocation decision, recycling the cash into highly value-creative investments going forward, and that’s how we can compound our value.
IB: In a number of cases we have identified companies that have environmental or social opportunities, or we think that their risks are fairly high because they are not disclosing it, and the first port of call for us is to look at what the companies are physically putting in the public domain, what they are publishing. Often it can be the case and we have found examples on a fair few occasions where the companies aren’t telling their story; they have a great story to tell but they are physically not telling it. It’s only when we engage with the management that we find out that actually they are doing a whole lot more than we ever gave them credit for. In terms of how we analyse companies and the flags that we are looking for, one of the things we are very conscious of is not to apply a broad global brush on how a company should be doing on an ESG perspective. It is very important really to look at it in its local market context.
RML: We are looking for alignment of interests; we’re looking for the right kind of decision-making that works for us. We also need to go quite deep; we can’t just do a tick-box approach, because, for example, you can have a really well-run Indian family company and you can have a really badly run one, and superficially they can look exactly the same, so it’s only by looking at their track record over the last ten-plus years that you can understand the true difference – have they treated the shareholders well for a prolonged period of time. It’s very important that corporate governance is the first question we ask of every investment case; it’s not an afterthought or engagement after the fact. It’s the first question we ask because, if that’s not true for an emerging-market company, then why are you bothering?
Ian Burger, head of corporate governance, and Rob Marshall-Lee, emerging and Asian equity investment leader, discuss the importance of focusing on ESG in emerging markets.
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