TBLI Weekly - March 28th, 2023
Robert Rubinstein
Leading Sustainable Investment Advisor | 25+ Years of Experience. Sustainable Finance Thought Leader of the Year
Your weekly guide to Sustainable Investment
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ESG investing in emerging markets faces major hurdles despite vital importance
ESG considerations have become core parts of investing in developed markets, but as emerging markets adapt, some fundamental distinctions have appeared between sustainable investing in the two regions.
Robert Horrocks, CIO of Matthews Asia, argued the main difference between ESG investing in emerging and developed markets was that in EM it "actually matters", as it can drive significant change.
Not only can investors allocate capital through an ESG lens in emerging markets, but he argued it is "the only place" they should.
Investments into emerging market companies can have a greater impact on their sustainability journey than in the developed world, where regulation and culture has already pushed companies to much higher standards.
Despite what Horrocks sees as an urgent need for a greater focus on ESG within emerging markets, there are some major hurdles to overcome for this investment approach to be successful in the region.?
Disclosure
Data availability has been singled out as a key barrier by all ESG investors, analysts told?Investment Week, which is often severely lacking in emerging markets.
Horrocks noted that of the about 10,000 companies in Asia, only 18.2% received comprehensive ESG coverage from Sustainalytics, while MSCI ESG scores covered 33.6% of firms.
There is also little correlation between ratings data among different analytics companies, leading to an often poor understanding of the ESG credentials of many companies based on ratings alone.
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Comparison of MSCI ESG and Sustainalytics risk scores
He gave the example of a bank in India, which provides low-cost loans to women, which was penalised by analytics firms due to failing to submit their gender diversity policy.
Sharukh Malik, portfolio manager of the Guinness Greater China fund, said the level of disclosure and data quality in the region was poor, leading to EM firms receiving weaker scores.
This is not "necessarily a bad sign", he said, noting that he frequently wrote to firms to request further disclosure to allow the fund to feel confident in their investment.
Malik said this correspondence with firms to encourage disclosure is a vital part of the ESG engagement that EM managers can pursue.
He added: "Developed market managers should use the same approach, so if a data point is not disclosed, first engage to find out more rather than immediately penalise the company."
Looking to China specifically, Malik noted the country's government had increased its focus on carbon neutrality, which had begun to slowly push firms towards greater levels of disclosure in the area, although he admitted this would be a "ten-year long process".
Jana Harvey, senior portfolio manager at RBC BlueBay, explained the growth in the ESG-labelled bond market, which requires greater disclosure and regular reporting, meant data availability was improving fast.
Sergey Dergachev, head of emerging markets corporates at Union Investment, also said that while many countries are behind EM on disclosure, there are exceptions such as Chile or Poland, which have quickly built up their ESG credentials.
Data quality can also vary significantly between sovereign and corporate issuers for those in the fixed income market, he added.?
Horrocks said: "I do think it is an area where if people really care about it, they have to look beyond the ETFs and the statistical approaches."
Raphael Lüscher, portfolio manager at Vontobel, agreed, arguing that in developing markets, investors often need to "roll back their sleeves and do a lot of the groundwork themselves".
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Who Supports ESG Investing And Who’s Against It (And Why)
With?President Biden’s veto of the Congress’s bipartisan joint resolution, ESG has been one of the hottest news stories in the financial world. Beyond the politics of it, proponents and opponents of the ESG push have their own reasons for staking out their positions. Would it surprise you to learn that self-interest plays a role?
What is ESG and how does it work?
At its most basic core, ESG is merely an extension of placing portfolio restrictions based on subjective, rather than accounting, factors.
“Explained in simplest terms, ‘ESG’ stands for environmental, social and governance which is an investing strategy that takes into account a business’s environmental and social risks as part of a broader financial analysis,” says Rob Reilly, finance faculty at the Providence College School of Business and investment consultant at North Atlantic Investment Partners in Boston.
How you use ESG will depend on how you define ESG. While there remains?no consensus about what the details of ESG are?in measurable terms, there is growing agreement on what the concept itself means.
“The basic theory behind ESG investing is that a company’s returns may be impacted by environmental, social, and governance factors in addition to traditional financial factors,” says Michael James Maloney, a partner at Felicello Law, P.C., in New York City. “The most common environmental issues cited are the effects of climate change like floods or fires. ESG social factors include the impact of a company’s actions on ‘stakeholders’ like employees and communities. ESG proponents argue that fiduciaries should consider the company’s actions regarding ESG factors when deciding whether to invest in that company’s stock.”
Structurally, it’s a relatively straightforward process to integrate ESG into a portfolio management system. You can treat it as an asset class or one of several criteria for stock selection.
“ESG is primarily a risk management tool,” says Andrew Poreda, VP and ESG senior research analyst at Sage Advisory Services in Austin, Texas. “ESG assessments better help corporations and investors assess risks that have previously been underemphasized by various stakeholders. It can also be used as an avenue to identify opportunities in a constantly evolving landscape.”
Low-cost loans offered to help residents make eco improvements
Residents in Bath looking to reduce the cost of heating their homes and cut carbon emissions are being reminded they may be eligible for financial help through a council-backed loan.
Bath and North East Somerset Council has partnered with Lendology, a social enterprise lender, to offer locals low-cost Energy Loans to fund energy-saving home improvements.
The partnership has been in place since 2005 and has lent more than ￡800,000 to homeowners across the district.
Owner occupiers and landlords can apply for a loan between ￡500 – ￡15,000, with a repayment term between six months and 15 years.
The interest rate (4.2% APR) is fixed throughout the term of the loan.
Homeowners who qualify for a low-cost Energy Loan can use the money to help spread the costs of installing energy-saving improvements such as solar PV, low carbon heating or insulation.
Councillor Sarah Warren, deputy leader and cabinet member for Climate Emergency and Sustainable Travel said: “By providing accessible funding we hope to enable people to improve the energy efficiency of their homes.
“It will help to reduce their household running costs, which is especially important given the current high cost of energy.
“Any essential repairs and improvements to decarbonise homes will also help to support the transition to net zero.”
In the period April 2022 to March 2023, ￡50,861 of energy loans were approved for residents in Bath and North East Somerset.
More information on the loans and how to apply can be found on the council’s Energy at Home website,?here.
Labour urges ministers to show ‘ambition’ as it recasts green growth plan
The shadow net zero secretary Ed Miliband to set out how plan will create jobs in clean energy
Labour is recasting its green growth plan as the British version of the US’s Inflation Reduction Act to underline its ambition to invest in good, clean energy jobs.
Ed Miliband, the shadow net zero secretary, will set out how the party’s green prosperity plan will deliver a multi-billion investment by government and businesses to drive jobs in green industries.
He will urge the government to “stop moaning” about the US Act, a landmark piece of legislation from Joe Biden’s administration that is boosting investment in domestic energy production while promoting clean energy, and instead match its ambition.
Ahead of the government setting out its own revised net zero plans on Thursday, Miliband has called on ministers to end the ban on onshore windfarms and step up investment in energy efficiency for Britain’s homes.
Rishi Sunak’s plans later this week are expected to include the government’s response to a high court ruling that its net zero strategy was unlawful. But green groups have expressed concern that the plans will not go far enough and could contain support for continued fossil fuel use.
At an event hosted by the Green Alliance, Miliband will warn that the UK, with all of its natural assets, cannot fall behind the US and the EU.
“What we have seen from the UK government is the actions of a group of people caught in the headlights,” he will say.
“[The trade secretary] Kemi Badenoch dismisses the Inflation Reduction Act as ‘protectionist’. Our current energy secretary Grant Shapps calls it ‘dangerous’. The chancellor dismisses it too.
“I profoundly disagree with this approach. As the US and Europe speed off into the distance in the global race for green industry, we are sitting back in the changing rooms moaning about the rules. Sore loser syndrome won’t win any jobs for Britain.”
Less talk, more action: solving SA’s energy crisis
A recent FM Green Economy conference discussed the shift towards cleaner industries and renewable energy solutions
The global focus on achieving sustainability imperatives that provide businesses with the social licence to operate is gaining similar momentum in SA. Building a green economy, where corporate SA conducts its business in a sustainable manner, is rapidly becoming table stakes in attracting foreign investment.?
A recent FM Green Economy conference, in partnership with Old Mutual Investment Group (OMIG), discussed the shift towards cleaner industries and renewable energy solutions to realise economic growth, competitiveness and inclusion.?
Tebogo Naledi, MD of OMIG, put the spotlight on capital allocations and how investment managers can drive impact through the listed market. He said SA’s policies are doing little to fast-track a just energy transition.
If the country is to meet its intended carbon emission reduction targets, it needs to urgently implement actions that will make a meaningful difference, given the growing demand from trade partners to reduce their carbon emissions.?
Demand for responsible finance is intensifying with policy interventions growing exponentially in the past 20 years, said Naledi. Despite policy interventions and greater demand from managers, he warned of a tendency by some companies to greenwash their ESG claims.?
He said OMIG, which manages more than R400bn of investments, believes in responsible investing. A transition to a low-carbon society needs to consider that SA is an emerging market and that disinvesting in fossil fuels overnight is not a good idea.??
“Our priority is on ensuring the transition to net zero is just and that we achieve real world decarbonisation,” he said.?
Matthew Cruise, head of public relations and business intelligence at Hohm Energy, a solar solutions and financing business, discussed Eskom‘s position after the president’s state of disaster announcement and the budget speech.?
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