hongkongen
Fact or fiction: SI does not work in emerging markets

Fact or fiction: SI does not work in emerging markets

Insight

Sustainability investing is well established in the West, though some doubt whether it can work in emerging markets battling with bigger issues. In fact, experience shows that emerging markets present both a huge investment opportunity and a distinct set of environmental, social and governance (ESG) risks and challenges.

  • Guido Moret
    Guido
    Moret
    Active Ownership Specialist
  • Masja Zandbergen
    Masja
    Zandbergen
    Head of ESG integration

Speed read

  • ESG adoption has been much lower in emerging markets
  • It’s still possible to find sustainable equities and bonds
  • Better governance and impact investment is also helping

Environmental threats include mass urbanization and deforestation, while the continuance of child or slave labor along with low pay presents social problems, and high levels of state or private ownership give rise to governance issues. Some emerging countries can’t adequately feed their own people, let alone adopt solar power or electric cars.

This sense of how poorly sustainability is adopted in Asia, for example, is reflected in figures by the Global Sustainable Investments Alliance. It said that of the USD 22.9 trillion invested by its members at the end of 2016, just USD 52 billion or 0.2% was in Asia outside Japan.1

So, is there any point in trying to invest sustainably in these regions? In fact, these very problems make using ESG even more important when building emerging market portfolios, particularly in knowing where to look for the bright spots.

And it has an even greater effect: research shows that while adopting ESG factors in developed markets has a positive effect on corporate financial performance in 38% of cases, for emerging markets that positive effect is seen in 65% of cases. Addressing the governance factor was shown to have the greatest influence.2

Discover all 9 new ideas on sustainability investing in our book

Download it now

Figure 1 | Relationship between ESG and corporate financial performance

Source: Friede et al (2015)

One way of creating more sustainable emerging markets funds is by taking a quantitative approach through factor investing, as discussed in a 2017 white paper by the Robeco quant team, ‘Going for green alpha in emerging markets’. In practical terms, this is done by building a portfolio that is 20% more sustainable than the benchmark, with a 20% lower footprint for water use, CO2 emissions, waste and energy use. In addition, this method uses an extensive values-based exclusion list, excluding companies from industries such as coal, tobacco, gambling and firearms production.3

It can also be important to combine differing emerging market strategies for equities, using both a fundamental approach looking at traditional ESG factors, and a quant approach seeking factors such as low volatility, where some markets offer the same returns at a lower risk. This is discussed in another Robeco white paper, ‘Combining quant and fundamental to diversify your emerging market equity portfolio’.4

Targeting emerging debt

Getting reliable data to be able to make informed decisions is part of the battle. Robeco’s emerging markets team has built a significant database that can assess risks and opportunities when building portfolios, using a combination of top-down factors to analyze countries and bottom-up criteria to find the best securities.

For the top-down assessments, the team makes use of RobecoSAM’s Country Sustainability Ranking (CSR). This twice-yearly report looks at a range of factors that particularly affect emerging markets, including susceptibility to corruption, levels of internal dissent, relative freedoms of the press and vulnerability to commodity prices such as oil for economic success. It contains and all-country index and a bespoke emerging markets index. The bottom three nations in the October 2017 emerging markets CSR were Nigeria, Pakistan and Venezuela, while the top three were Singapore, Hong Kong and the Czech Republic.5

The truth about sustainability investing: fact & fiction
Watch the video

Governance improvements

One area in which sustainability can be shown to have made a difference is in corporate governance improvements in Asia. Robeco has long engaged with investee companies to try to address issues such as the lack of women or independent directors on boards, or unfairly treating minority shareholders. Governance improvements have been so tangible in Japan and South Korea that stock market multiples are now expected to rise, Robeco reported in October 2017.6

Meanwhile, the adoption of voluntary Stewardship Codes in Asia which promote active ownership by investors has increased levels of engagement, voting at shareholder meetings, and exclusions of companies that don’t meet minimum requirements, generally raising standards.

Perhaps the last word should go to the authors of an influential research paper by the specialist ESG data provider Sustainalytics entitled ‘Bridging the gaps: effectively addressing ESG risks in emerging markets. “Emerging markets present both a huge investment opportunity as well as a distinct set of ESG risks and challenges,” they said.

“Although investors generally perceive ESG risks to be larger in emerging markets than in developed markets, they are applying responsible investment strategies to a lesser degree when making emerging markets investments. Yet, especially in the context of emerging markets, addressing ESG risks can be very rewarding for investors wanting to reduce portfolio risks or looking for investment opportunities.”7

1 Global Sustainable Investment Alliance, 2017 Review
2 Gunnar Friede, Timo Busch & Alexander Bassen, ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’, Journal of Sustainable Finance and Investment, November 2015.
3 Wilma de Groot and Tim Droge, ‘Going for green alpha in emerging markets’, 2017
4 Fabiana Fedeli and Wilma de Groot, 'Combining quant and fundamental to diversify your emerging market equity portfolio’, 2017
5 For more information about how the CSR is compiled, go here
6Interview with Arnout van Rijn, Chief Investment Officer for Robeco Asia-Pacific Equities, October 2017
7 Andrea van Dijk, Lotte Griek and Chloe Jansen, ‘Bridging the gaps: effectively addressing ESG risks in emerging markets’, Sustainalytics, 2012.

Sustainability Investing
Sustainability Investing

Discover all 9 new ideas on sustainability investing online.

Read more

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

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. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree