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Driving Incremental Change in Emerging Markets

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Stockholm (NordSIP) – During the second week of April, I had the opportunity to meet Fiona Manning from Aberdeen Standard Investments (ASI) to discuss her views and experiences in sustainable investing and emerging markets.

Manning is a portfolio manager and investment director with ASI’s global emerging market equities team where she is responsible for sustainability. She joined ASI in 2005 as an investment manager and has focused on the asset manager’s Latin American and Global Emerging Markets Equity portfolios.

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She is quick to dismiss caricatures of emerging market companies. “It would be a mistake to think of emerging market companies as unsophisticated. Although they may not have articulated these issues in the way that developed markets would have, companies in Latin America are, nevertheless, definitely thinking of the impact of their activity, environmental or otherwise.”

“There are significant cultural differences,” she acknowledges, “but most of my experiences are positive.” Aberdeen’s investment selection process has been decisive, she explains. “We look for the best quality companies at the most attractive valuations. By the time we are talking to companies we have already weeded out a lot of the poor performers, sustainability-wise.”

The key to this successful selection process is the integration of ESG sustainability factors into the mainstream financial analysis Aberdeen fund managers do, she explains. “Measuring sustainability is challenging. How do you measure something that might happen in 20 to 30 years’ time and integrate it as a part of the price of the stock today?”

“Our fund managers’ assessment of an investment’s future performance includes assigning a rating to companies based on their ESG risks and opportunities. ESG is an integral part of understanding each investment case from a financial perspective. It is just good business,” the portfolio manager explains. “If a company breaches environmental standards, there will be fines. That is a financial risk. If a mining company is not providing enough for environmental remediation, there is a cost to that further down the line. When a mine reaches the end of its life, and the cost of returning the environment to its original state is substantially higher than what was initially provided for, that is a cost that the market may not have factored into the share price.”

“But we also have a central team of ESG specialists, focusing on particular topics and themes, whose research we can also use for our program of engagement,” the investment director adds. “The research they conducted on plastic waste, for example, facilitated a more informed conversation with FEMSA, the Coca-Cola bottling firm, in Mexico. It allowed us to discuss how they address returnable presentations, how they think about reuse and recycling in their supply chain, for example.”

“We take engagement very seriously,” says Manning. “We believe that as owners of businesses we need to engage with the management teams and boards of directors to drive incremental positive change. Changing companies’ culture is a slow process. Being a long-term investor allows us to do that over many years.”

“Many of our emerging market companies are controlled companies, where a single shareholder, often a family, owns the majority of the shares. We are almost always minority investors,” she explains. “This is positive as it gives us a clear interlocutor with a shared long term view.  But governance standards are often lower, and there can be issues with generational transition and succession. We are not activist investors. We are active owners. Unfortunately, boards are often less independent, and we need to ensure the representation of minority investors and that those boards can challenge family owners over strategy and capital allocation.”

“Our engagement focuses on ways to improve the skills on the board of directors to the level required to deal with the future challenges the companies will face. For example, when we engage with Santander in Chile or Banorte in Mexico, we talk about the level of cybersecurity and financial inclusion expertise the board will need to think about how markets will develop over the next 20 years.

While the UN SDGs inform engagement, they are in the background of her conversations, Manning admits. “Most of what we do are mainstream investments. When I speak with Enel Chile, for example, we discuss a range of issues that could be mapped to the SDGs. We talk about hydroelectric power generation, their management of water usage rights and how the balance with local communities’ agricultural usage rights. We also discuss their transition to renewables and divesting from fossil fuels, which banks are increasing shunning. These are issues covered by the SDGs, and they are part of the conversations we have.  We just do not use their terminology in our mainstream engagement.”

“The SDGs are more central to the niche of impact investment. Our global impact fund addresses the needs of clients whose investment approach or ethical framework demands addressing the world’s biggest challenges,” Manning concludes.

Picture courtesy of Aberdeen Standard Investments

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