In recent months, several telecom companies with operations in emerging markets were faced with corporate governance issues. These issues had huge consequences and highlighted the negative risks for bondholders. They show that integrating environmental, social and governance (ESG) factors into the analysis is key in assessing the downside risk of credit investments.
One of the cornerstones of the investment philosophy of Robeco’s Credit team is that avoiding losers is more important than picking every winner. This is a direct consequence of the fact that at best bond investors get their money back plus compensation in the form of interest, where on the downside they could lose it all. Analyzing ESG information helps us to understand the downside risk better and spot potential losers.
In this article we focus on the ‘governance’ element in ESG, or to be more precise, corporate governance. Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a company is run. It also includes the relationships among the many players involved (the stakeholders) and the corporate goals. Stakeholders include shareholders, management, and the board of directors but also employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
In emerging markets, companies tend to be confronted with corporate governance issues more frequently than in developed markets. Examples are having criminal partners or the more common practices of bribery and corruption. Some telecom companies, for example, have been asked to make illicit payments to obtain licenses in certain emerging markets. We think that in some cases telecom companies have not properly evaluated the risks of doing business in these countries at the time of entering them.
Recently several telecom companies have had to deal with corporate governance issues related to their business in emerging markets:
One of the reasons that these matters are becoming a bigger issue is that the US Department of Justice (DOJ) has moved its focus to the telecom sector. At the same time, the DOJ wants to hold individuals, mostly corporate executives, more accountable for corporate wrongdoing.
As these examples show, (telecom) companies are more likely to be confronted with issues like having criminal partners or the practice to bribe politicians to obtain licenses in emerging markets than in developed markets. In addition, they demonstrate that corporate governance issues can have far-reaching consequences, both financially for the company and personally for its directors. Investors were also impacted directly by the controversies described in the examples; bonds have been hit hard as they reflect the increased financial risks of underlying companies.
The Robeco Credit team has been very cautious on emerging markets over the last year. Spreads have been too low compared with spreads in developed credit markets. These examples show in our opinion that emerging market credits should carry a country or corporate governance premium, even if their credit ratings are in line with developed market credits. This additional spread is the compensation we demand for running higher credit risk.
Understanding potential corporate governance issues for telecom companies operating in emerging markets is a key element in understanding the downside risk of the credit investments in these companies. This is why we have integrated ESG into our credit research process. We treat the ESG variable as one of the five building blocks that underpin our final fundamental opinion on a company’s credit. In addition, we do our own proprietary research, also on ESG. The recent issues in the telecom sector strengthen our belief in this approach.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.