Continuing ESG Clarity‘s outlook series looking at various asset classes from an ESG perspective and trends in the wider responsible investment industry, here emerging market investment professionals share their forecasts and positioning for the year ahead.
Increased digitisation and better engagement with companies should have a positive impact on the transition to a low-carbon future, but the ESG lenses that work in developed countries may not pick up issues elsewhere.
Hugo Robinson, head of research, Arisaig Global Emerging Markets Consumer Fund
The first big trend here relates to data security and privacy. Both China and India have new data protection laws coming into force imminently that will increase the pressure on companies to acquire, process and store their data in a responsible way. This is relevant to all businesses, but especially so for data-intensive industries such as consumer internet and payments. These sorts of businesses make up around 40% of Arisaig’s Global Emerging Market Fund.
Second, we are starting to see governments in Asia mobilise against climate change, with China’s commitment to net zero by 2060 a clear statement of intent. We are likely to see more immediate proposals in the next five-year plan, set to be announced in March 2021. China’s increasing importance in international standard-setting means these policies are likely to have spill-over effects on emerging markets more generally.
At Arisaig, we intend to move our portfolios to net zero by 2050, and have already begun engaging with our investee companies to encourage this transition to a low-carbon future.
Both data security and decarbonisation are relevant to a third trend: the rise of the dematerialised economy. This will be a multi-decade event, driven by increasingly environmentally conscious consumers; by corporates seeking to reduce their resource intensity amidst greater scarcity; and by technological change.
The most obvious example of the latter is the replacement of physical media such as newspapers and video cassettes with digital equivalents; and many bulky electronic products being compressed into a single device in our pockets: the smartphone. Combined with cost collapses in both data and software, this all means wallet spend is increasingly flowing to intangible forms of consumption such as gaming, education and streamed media.
Given the sheer scale of emerging markets, the dematerialisation of consumption here is both essential for humanity’s low carbon transition, as well as being one of the most compelling investment trends of the coming decades. We have positioned our portfolios accordingly, first by divesting very resource intensive sectors such as dairy, second through a more assertive allocation to digital platforms.
Tom Baird, senior vice-president, Redington’s manager research team
Many companies that on the face of it may appear strong through one ESG lens may have serious issues through another. For example, you may see a micropayment company that’s having a huge impact on financial inclusion within developing nations positively, but fail to realise the serious issues around bribery surrounding it.
On the environment side, while clearly a global issue, it is becoming of particular relevance within China. While we do not think investment decisions should be driven by government policy there is certainly strong evidence that it is not sensible to invest against the Chinese government. It’s clear climate policy forms an important part of Xi’s long-term plans so investing in companies that do not consider their role in this (whether it be helping or hindering) should be considered carefully.
Manraj Sekhon, CIO, Franklin Templeton Emerging Markets Equity
The tone of engagement in emerging markets has shifted: companies that formerly took a narrow, hard-nosed approach to returns are adopting more accommodative measures. We have seen leading companies in South Korea publicly apologise for governance missteps and manage their balance sheets more effectively through returning capital to shareholders.
Naoya Oshikubo, senior economist, SuMi TRUST
Covid-19 has increased demand for a number of digital services such as cashless payments, online medical care, working from home technology and also online shopping and computer games. It is unlikely this demand will fade once the pandemic is brought under control. Japan lags other developed countries in these areas so companies providing online services in Japan have more scope for growth.
To view ESG Clarity’s outlook series, click here.