Does ESG matter in SA and other emerging Markets?

Despite increasing global attention on the importance of Environmental, Social and Governance (ESG) considerations, ESG investing continues to be less prevalent in emerging markets (EM) and the bulk of ESG assets, as well as the majority of growth in ESG assets, remains in developed markets.

This is according to Jessica Ground, Global Head of Stewardship at global asset manager, Schroders, who was speaking at the fourth annual Schroders Investment Symposium, where top representatives from the South African asset management industry gathered to gain insights from international experts into the developments and challenges that global asset allocators are facing in a rapidly changing industry and economic environment.

“We know that EM will play an expanding role in capital markets as time goes by, and while some global asset managers feel that ESG issues don’t matter in these countries or have little impact on the companies, our investors have long felt that ESG can have a real influence on share price performance and the academic evidence supports this,” says Ground.

She refers to the below chart taken from a meta-analysis which combined results from more than 2,200 unique primary studies released since the 1970s. “This chart shows that while across all regions, the majority found a positive ESG impact on corporate financial performance; there is an even stronger positive impact on corporate financial performance from ESG investing in EM versus developed markets.”

ESG-CFP* relation in various regions (vote-count studies samples), n=402 net studies[1]

At the Symposium, Ground used the example of water scarcity – an issue that has directly impacted the South African market in recent times – where Schroders has already experienced significant success in actively embedding ESG practices across all investment processes and products being offered.

“Back in 2016, we set out to map exposure, water efficiency, and management action across a number of beverage companies. This is because we knew that the beverages sector is highly dependent on water and the brewing sub-sector is particularly vulnerable to changes in regulation and increasing water-related costs.

“While South African Breweries (SAB) was identified as the third most exposed company, globally, to water scarcity issues, it also became apparent after engaging with management, that the company was well prepared to handle such an issue, should it arise. This gave us much more confidence in our existing holdings, and our thesis was proved correct in 2018 when the drought hit and SAB were able to effectively manage their stakeholder relationships by indicating to authorities that they were able to switch over to producing just bottled water, instead of beer.”

This, Ground says, is a perfect example of how active managers with the resources to undertake thorough research and analysis, including engagement with company management, are able to select those companies with the most sustainable business models. “Engagement also provides investors an opportunity to support and encourage sustainable growth, where laws and regulations may not yet be in place to do so,” she adds.

It is important to remember, however, that EM represents a heterogeneous set of markets, says Ground. “This makes it a complex and large opportunity set. The increasing availability of quantitative screens and indices is making ESG investing progressively accessible and raising awareness of the importance of incorporating such considerations into investment decisions.
“Engagement with companies and governments, thorough due diligence; a consideration of investments on a case-by-case basis; and participation in industry groups, are just some of the ways that investors in EM are able to positively influence the direction of growth for some of the fastest developing markets in the world,” she concludes.