An Emerging Markets Approach to ESG: Our Progress

May 09, 2019

Our Portfolio Managers believe ESG factors matter for company results and will exclude a company based on our assessment of material ESG risks and how the company is handling them. Our ESG process is truly integrated—and the final decision makers, the portfolio managers, lead the engagements.

We provide a high level of transparency into our ESG process with detailed tracking of our engagements. We believe integrating information about ESG issues into our investment process makes us better investors and is consistent with our approach as long term, growth managers in the emerging markets.

ESG Integration into Our Investment Process

As fundamental investors we seek out areas of growth and opportunity which we believe will last for the next 3 to 5 years and sustainable, well-run businesses which can capitalize on these trends. Our research process considers environmental, social and governance issues that confront policymakers and company management, because they matter for sustainable growth. Information we gather about the environmental, social and governance issues faced by both country policymakers and company management teams helps us build a more complete picture of these investment opportunities and the potential risks involved. ESG is integrated throughout our investment process at both the company engagement level as well as in our top-down country analysis.

Our investment process integrates ESG analysis in a simple and repeatable way: identifying and assessing material issues and engaging company management on these issues.

Our Active Ownership Approach

IDENTIFY AND ASSESS MATERIAL ESG ISSUES:

We identify the issues that are most material to the health of the business we are analyzing. We look by industry at the issues most directly linked to key business drivers for each company—for example resource efficiency in heavy industries, working conditions in labor intensive sectors, and talent attraction and retention in intellectual property based industries.

We have access to several different ESG resources, which help our understanding of the key ESG issues, including the Morgan Stanley Institute for Sustainable Investing, MSCI ESG ratings and research and sell-side ESG research, and the company’s own disclosure on corporate social responsibility. While we draw on these external resources, rather than simply relying on a third-party rating, we focus on understanding the issues raised by these providers and conducting our own analysis on these issues and the companies’ accompanying strategy. We ultimately form our own independent judgment based on our analysis and engagement with management.

ENGAGE WITH COMPANIES:

Our portfolio managers travel widely meeting with company management as part of our due diligence process. During these meetings we engage management with questions on the most pressing ESG issues facing their business. These conversations often give us information we need to focus on and dig deeper in later meetings. Over time, we have found increasing management interest in ESG issues, especially when ESG can be tied directly to the company’s financial outlook. We also support good corporate governance through proxy voting and will vote against board recommendations we do not perceive to be in the best interests of shareholders.

TOP-DOWN COUNTRY ANALYSIS:

ESG factors are deeply embedded in Our Rules of the Road framework for identifying economies with a promising growth trajectory. The rules assist in measuring balance across the cycles—from politics to credit, investment and market sentiment—that shape economic growth. ESG factors can and do play an important role in tipping these balances. As long-term investors, we firmly believe that a strong system for monitoring ESG in emerging markets helps us stay alert to the risks and opportunities of our company holdings for the long haul.

Click the PDF for our engagement statistics over the past year and examples of engagements with management on ESG issues.

Global Emerging Markets Team

The Global Emerging Markets team bases its investment philosophy on proprietary research that shows how both country-level and stock-specific factors can drive risks and returns in emerging markets.

An Emerging Markets Approach to ESG: Our Progress

RISK CONSIDERATIONS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline. Accordingly, you can lose money investing. ESG Strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the Portfolio’s performance. Illiquid securities may be more difficult to sell and value than public traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

DEFINITIONS

“ESG” investment: Environmental Social and Governance based investment is an investment approach which takes explicit account of the environmental, social and corporate governance aspects of all proposed investments.

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