Investment Insights

Global Emerging Markets

Through the ESG Lens

29 May 2020

Emerging markets have made great strides when it comes to ESG over the years, and there is now a constellation of companies which can go head to head with their developed-market peers.

Why ESG Matters

There is compelling evidence that ESG factors influence returns over the longer term. As bottom-up investors with a long-term philosophy we include ESG considerations when assessing companies as we believe these factors are critical to a company’s ability to generate sustainable long-term returns. Importantly, this assessment is conducted within our team by portfolio managers rather than managed by a separate ESG research team. In our experience, this ensures that these matters get a proper weighting in the conviction-building process. We work in close collaboration with Martin Currie’s Head of Stewardship & ESG, an experienced investor, who assists with voting policy and promoting best practice.

A Focus on Materiality

Our analysis and engagement efforts are guided by the materiality of issues in relation to each company. There is a growing body of research supporting such a focused approach, underlining a strong correlation between material ESG factors and returns. Over the years, we have developed extensive in-house resources, including industry frameworks which ensure that we focus on the most relevant questions. We consider a range of ESG factors every time we evaluate an investment and in every instance we assess how the company will be impacted by climate change.

We also recognise that no two companies are identical and as such we consider each company’s individual circumstances when assessing ESG performance.

Proprietary Governance and Sustainability Assessment

We have developed proprietary assessment frameworks to support our analysis across the different industries, countries and corporate cultures of emerging markets.

Governance sits at the heart of our analysis, as we believe this is a fundamental determinant of long-term performance and thus the sustainability of a business. Our governance assessment includes a review of ownership structure, board composition, remuneration, capital allocation, information disclosure, business ethics, management accessibility as well as how minority shareholders have been treated historically. We perform this assessment routinely for every company we research and distil our findings into a numerical score to reflect our conclusion on governance strength.

In our experience, good governance goes hand in hand with management of social and environmental risks, making it a good proxy for wider performance. The end goal is to develop insight as to whether a company will be a good long-term steward of our clients’ capital.

We use our sustainability framework to assess awareness, exposure and management of external risk factors. These include supply chain risks, environmental risks, regulatory risks and societal risks. As with governance research, we perform this analysis on every company we research and distil our findings into a numerical score to reflect our conclusion on business sustainability.

Importantly, we appreciate that companies are on a journey when it comes to ESG performance, so a firm that falls short of our expectations will not automatically be ruled out if we can see potential and a willingness to improve.

Martin Currie Governance and Sustainability Scorecards

Source: Martin Currie.

Engagement and Voting

Engagement and voting are two areas where we can make the biggest difference as active investors. Engagement allows us to improve our understanding of the opportunities and challenges companies face as well how management are adapting to these. Ultimately this leads to our investment decisions and voting decisions being better informed.

In our experience, there is a clear appetite for engagement and learning by emerging market companies. We leverage our extensive experience and understanding of ESG matters to help companies deliver improved outcomes from engagement. Our input is increasingly recognised by companies and we are regularly approached to provide input and support to improvement initiatives. Active ownership, through our engagement and voting, is a key element of how we discharge our stewardship duties on behalf of our clients.

ESG in Emerging Markets

Emerging markets have made great strides when it comes to ESG over the years and there is now a constellation of companies which can go head to head with their developed market peers. Indeed, recent research has underscored that emerging markets have caught up with developed ones when it comes to environmental and social performance, even if differences remain in terms of governance metrics. Investors should be cognizant of different ownership dynamics – government ownership is more prevalent, and while this may not be a problem, understanding the motivations and stakeholder alignment in such cases is important. Equally, family ownership is more common than in developed markets, but as studies have shown, investing alongside family owners can be a very beneficial long-term strategy.

Leading the Way

We observe a wide range of approaches to ESG both at a company level and between countries, and in a number of areas emerging markets lead by example. For instance, in South Africa the adoption of the 'King Report on Corporate Governance' has led to some of the best integrated reporting anywhere in the world, communicating a clear holistic approach to strategy, planning and how companies’ resources are used to create value. We are seeing growing adoption of integrated reporting in other emerging markets and many companies are reporting how their activities align with the UN’s Sustainable Development Goals (SDGs).

Our work also shows another area where emerging markets differ from US norms is on board structure. Here, emerging market companies generally have better age diversity and shorter-tenured directors. There is also far less controversy around executive compensation, due to the relatively modest pay packages typically offered to emerging market executives. While incentive schemes still require scrutiny, our focus tends to be on ownership structures and board composition.

When it comes to environmental issues, government policy will often play a role. Here it is important to highlight that many emerging market countries have reaffirmed their commitment to the Paris Agreement on climate change, following the US’s decision to leave. There is also progress amongst asset owners, as witnessed when four emerging market based sovereign wealth funds joined forces with two developed market funds to create the One Planet Sovereign Wealth Fund Framework. This partnership aims to accelerate the integration of climate change issues into the management of these large, long-term asset pools.

The appetite for engagement and learning shown by emerging market companies is often stronger than that exhibited by their developed market counterparts. They are also genuinely willing to listen and respond to investor input, a feature that enhances the influence we can have as stewards of our clients’ assets.

Room for Improvement

Whilst most companies in emerging markets recognise the importance of ESG, there is still much that can be done to meet the expectations of asset owners. Rather than poor underlying practice, it is often simply a matter of disclosure, with management lacking an awareness of the importance investors attach to these factors.

We are seeing signs of progress on disclosure with initiatives such the Task Force on Climate-related Financial Disclosure and SDGs bringing better consistency. We are also pleased to see the development of scenario analysis tools, with the Transition Pathway Initiative and the Paris Agreement Capital Transition Assessment both gaining traction.

Martin Currie and ESG at a Glance

The concept of stewardship is at the heart of our philosophy as active equity specialists, and ESG is a critical component of this, informing our research and engagement efforts. Analysis of these factors has been embedded in our emerging market team’s stock research process since the inception of the strategy. As a firm we routinely engage with businesses to improve awareness of sustainable business practices and to effect change. While most of our engagement takes place in private, we often join up with other investors when we deem this to be more impactful than acting alone. Recent examples of the latter include engagements on water risks in the agricultural supply chain, labour practices in the food retail sector, and cybersecurity.

As signatories to the Principles for Responsible Investment (PRI) we have committed to report on our activities in relation to responsible investing each year. We have consistently been highly rated by the PRI in their annual assessments and in 2019, for the third year running, achieved the highest possible rating (A+) in all top-level categories: ‘strategy and governance’, ‘incorporation’ and ‘active ownership’. We have also received the highest ranking (Tier 1) by the Financial Reporting Council for our statement of compliance with the UK Stewardship Code. Importantly, we believe in holding ourselves to the same standards that we expect of others and live our values through the management of our own business. This includes participating in industry initiatives to raise the profile of ESG issues, as well as sharing ideas about best practice.



Developed markets (DM) refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.

The One Planet Sovereign Wealth Fund Framework was established in order to accelerate efforts to integrate financial risks and opportunities related to climate change in the management of large, long-term asset pools.

The “Paris Agreement” refers to the 2015 United Nations Climate Change Conference, COP 21 or CMP 11 was held in Paris, France, from 30 November to 12 December 2015. It was the 21st yearly session of the Conference of the Parties (COP) to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties (CMP) to the 1997 Kyoto Protocol.

The Paris Agreement Capital Transition Assessment or PACTA tool, analyzes exposure to transition risk in equity and fixed income portfolios over multiple scenarios, thereby helping to reduce information barriers on how climate scenario analysis can be done.

The UN Principles for Responsible Investment (PRI) is an international organization that works to promote the incorporation of environmental, social, and corporate governance factors (ESG) into investment decision-making.

The Task Force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.

The Transition Pathway Initiative aims to define what the transition to a low carbon economy looks like for companies in high-impact sectors.

The UK Stewardship Code is a part of UK company law concerning principles that institutional investors are expected to follow. It was released in 2010 by the Financial Reporting Council, and is directed at asset managers who hold voting rights on shares in United Kingdom companies.

The UN Sustainable Development Goals (SDGs) are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice.

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