Stockholm (NordSIP) – In a nod to asset owners’ rising interests, sustainability concerns featured prominently in Skagen’s 18th New Year Conference, with Tim Warrington, CEO of Skagen, singling out the outperformance of these strategies in his opening address. “The trend to sustainability continued [in 2020],” he said. “In 2019 we remarked on the fact that sustainability went mainstream, but in 2020 we really saw it grow. We saw significant flows to sustainable solutions and clean energy companies did particularly well.”
However, the ESG opportunities in emerging markets highlighted by Dr Mark Mobius (Pictured), founding partner of Mobius Capital Partners (MCP) and a conference participant, stood in contrast with his unorthodox views about the role of political institutions.
Mobius Sees Light at the End of the Tunnel
The dominant topic of discussion was COVID19 and its impact in the year ahead. While some expressed concern, Mobius displayed cautious optimism regarding the outlook for 2021 and the post-COVID19 recovery, particularly in emerging and frontier markets. “I believe there is going to be an incredible recovery (…) as a result of the solutions being found regarding COVID19. We are looking forward to really really good growth opportunities in emerging markets”.
The veteran investor is credited as one of the pioneers of emerging markets for his work during the 30 years he spent at the head of Franklin Templeton Emerging Markets Group. Upon leaving Franklin Templeton in 2018, Mobius set up MCP, an asset management company specialising in long-only investments that help portfolio companies improve their corporate governance to deliver a clear ESG pathway in emerging and frontier market.
Citing favourable GDP growth differentials in emerging markets as well as the faster growth in the consumption of their middle classes, Mobius added that further outperformance can be found in companies that are ESG leaders. According to him, higher ESG integration is correlated with higher earnings in emerging markets, not just lower risk.
“We engage to improve corporate governance and thereby impact environmental and social objective,” Mobius said. Discussing MCP’s engagement on sustainability, he highlighted the case of APL Apollo Tubes, a leading Indian branded steel products manufacturer with a market capitalisation of US$1.5 billion. As an investor, MCP pushed Apollo to shift to one of the big 4 auditors to increase transparency, the prioritisation of material ESG factors, the publication of a sustainability report, the adoption of Task Force on Climate-related Financial Disclosures (TCFD) reporting standards, the integration of ESG targets in executive compensation and increased gender diversity at the board level. Mobius argues that the implementation of these changes had an important positive effect on the company’s share price.
According to Mobius, the biggest challenge when working in emerging markets and focusing on governance is “to obtain the cooperation of the management of these companies to help with these ESG factors.” He explains that if management is not willing to engage towards improved ESG performance, MCP will not actually invest. “APL Appollo was very keen to take action.”
Benevolent Dictators and Corruption
Focusing on the role of sustainability factors in emerging and frontier markets more generally, Mobius acknowledged the presence of governance issues. However, he made light of the illiberal political systems overseeing many of these economies, seemingly ignoring the potential for any connection between undemocratic regimes and corruption, geopolitical instability, and human rights violations. As an issue that remains important, not least in the Middle East and China, his seeming endorsement of undemocratic regimes did not go unnoticed.
“The democratic framework is not very common in emerging markets,” Mobius explains. However, his experience is that most people around the world would echo Aristotle‘s words that “the best government is a benevolent dictatorship. This is a preference that you see in a lot of the emerging market countries. They want to have a strong one-man or one-party rule,” he explains. “You see that in Singapore, in China and many other countries.” Discussing the system in Dubai, where he is based, Mobius remarks that “the leadership is very cooperative and mindful of the benefits to the citizens of the country,” he adds.
“That does not interfere with our cooperation with companies,” he says. “We find that companies are willing to work with us and improve, without interference from the government in any direction. The government structure is important. A benevolent dictatorship and a benevolent one-party rule are not bad. It is often good. We look at how the rules and regulations are formulated and most importantly, whether the rule of law is credible.”
Instead, the veteran investor chose to relativise the problem of corruption in these markets, seemingly treating it as an exogenous factor. “Corruption is with us around the world, in democracies and dictatorships, even in the US.” According to Mobius, “you have to work around it, realise it exists and look for it.” Nevertheless, he did warn prospective investees that MCP has zero-tolerance for corruption. “One of the things we examine very carefully when looking at companies is the degree to which they are engaging in any kind of corruption. This would be a ‘no, no’ and we would exit the company immediately,” he said.
However, Mobius recognises that that assessment is complicated in emerging markets and requires engagement with local stakeholders beyond the investee. “It’s important to talk to the company, but also to their competitors, their customers, and anyone else who can tell you something about the environment and the company’s behaviour. That’s why some of the ESG factors are very important. If you examine the social framework – how the company treats its customers and its neighbours – you can gather a lot of information critical to evaluating the company. You cannot just depend on what the company is telling you. You have to go into the street and talk to the people that are dealing with the company or being impacted by the company in some way.”
Image courtesy of SKAGEN