Companies and governments in many emerging markets are not legally obliged to disclose as much ESG information as they are in developed nations. This has led to worries that lower standards, or greenwashing by companies that don’t have measurable rules could prove disastrous for investors.
Vale SA’s dam collapse in south-eastern Brazil a year ago unleashed 9.7 million cubic meters of mining sludge that buried part of a town and killed 270 people. The catastrophe wiped out a quarter of the miner’s market value at one point, and has scarred the company’s reputation.
“You need to have your own proprietary fundamental research,” said Claire Peck, an investment specialist in London at JPMorgan Asset Management, with $1.9 trillion in assets. “You have to be more research intensive as an investor because of that lack of transparency and also lack of coverage by major ESG providers.”
That analysis has to include not only the social aspects of the investment, but the long-term viability of the financial model.
“There are a lot of solar tech companies for example, but if you look at some of them historically, they have been either frauds or haven’t met their cost of capital,” said Peck. “A business that doesn’t consider the environment is not sustainable, nor is a solar company that cannot meet its cost of capital.”
But doing the research independently adds to the expense, especially as ESG standards stipulated by index providers are constantly changing.
S&P Dow Jones Indices LLC is reviewing its sustainability benchmarks to include factors such as flexible work arrangements and a firm’s governance structures for handling sudden risks from medical issues. MSCI Inc. expects its ESG offerings to eventually gain more of a following than traditional benchmarks.
While ESG may be a good long-term bet, the volatility in today’s markets means investors have to be cautious.
“We are looking at some of these longer term trends but also realizing that in the near term, markets are more likely going to be driven by a tweet or the latest development with Covid,” said Karan Talwar, investment specialist in Hong Kong at BNP Paribas Asset Management. “Our focus has always been to focus on idiosyncrasies and not paint EM with a broad brush.”
While the pandemic has put the spotlight on ESG, it hasn’t spelled an end to traditional investing strategies, according to Stuart Ritson, fund manager for emerging-market fixed income at Aviva Investors in Singapore.