Emerging markets present range of hurdles to ESG investing

A mix of cultural and pragmatic barriers complicate ESG investing in emerging markets, says Rob LeDoux, an investment specialist with J.P. Morgan Asset Management.

He said the wide variety of regulatory policies, market structures and financial norms among emerging markets pose a challenge to investors who wish to select assets that meet their ESG requirements.

There can also be language barriers and disparate views about data transparency, LeDoux said.

“The availability and credibility of financial disclosure, especially related to ESG, varies widely across both regions and sectors, making it difficult for investors to compare companies across the asset class,” he said.

But while investing in emerging markets can present higher hurdles, he said it can also present attractive opportunities. Speaking on the Soundbites podcast this week, LeDoux said emerging markets are making steady progress in thinking sustainably and reporting their ESG efforts.

He pointed out that in 2020, 86% of companies on the Shanghai Shenzhen CSI 300 index produced ESG reports — up from just 49% in 2010.

“With that said, there’s still room for improvement,” he said. “The transparency of the methodology and the consistency of disclosure still leave much to be desired, but these reports are consistently improving and we expect them to continue to do so over time.”

LeDoux said the evolution toward more qualitative and quantitative reporting will help investors measure company progress over time.

He has found opportunities in a wide variety of regions and sectors, including IT companies in Taiwan, select financial companies in South Africa and India, and consumer companies in Brazil.

And, “given the sheer number of listed companies available to choose from in China, we’ve found opportunities there amongst consumer-related companies as well,” he said.

Meeting with company management is a key part of ESG investing, he added.

“Company visits form the cornerstone of our research approach at the stock level,” he said. “We believe it’s important to meet with the people in charge of running these companies, to better understand what their motivations are and understand their thought processes.

He describes the investor meetings as “give and take.”

“Not only do we ask questions to the company, but we share best practices with them, especially when it comes to ESG,” he said.

LeDoux also considers board diversity and independence.

“We prefer there be diverse views and healthy debate as companies make decisions about their long-term strategies and approach,” he said. “There is a risk that differing viewpoints diminish over prolonged periods. Given that, we have, from time to time, voted against long-serving directors at various companies.”

The bottom line in ESG investing, he said, is to support profitable companies operating in a globally sustainable fashion.

“In our opinion, ESG is improving within emerging markets, and we believe this will create interesting opportunities.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.