We discuss ESG issues in emerging markets with Usman Ali of Mobius Capital Partners, a London-based emerging and frontier equities markets asset manager.
ESGI: Which counties and markets do you invest in?
UA: Emerging and frontier markets so this really varies from Argentina to Zimbabwe. Currently we are particularly positive on India, Brazil and Korea.
ESGI: Are you a stock picker or are you mainly involved in index investing?
UA: At Mobius Capital Partners, we offer a specialised strategy based on actively partnering with portfolio companies. We see ourselves as constructive activists.
ESGI: What elements of ESG investing (environmental, social and governance) do you attach most importance to?
UA: We integrate all material factors into our investment process. However, we have a strong emphasis on governance. Our area of engagement is broad but is focused on increasing long-term shareholder value. Potential governance improvements may be made in, but are not limited to: capital allocation, management remuneration structures, board independence, balance sheet restructuring, investor relations, operational inefficiencies, capital structures and acquisitions and divestures. When we identify such problems, we address these in private meetings by partnering with management teams, boards and controlling shareholders. We strongly believe that a regular constructive dialogue is the bedrock of the active ownership approach we pursue.
ESGI: Do you do your own ESG ratings or do you use ratings providers?
UA: We conduct deep private equity like research on all portfolio holdings. We see limited value add in quantitative scoring of companies as regulations vary dramatically throughout emerging and frontier markets. Furthermore, ratings do not often capture a holistic assessment of a company. For example, a company may have a high number of independent directors on the board but many of the directors may be unprepared when attending board meetings. Accordingly, they may fail to protect the interests of minority shareholders. This cannot be assessed via a quantitative rating.
ESGI: Are emerging markets ESG ratings generally lower than developed markets equivalents?
UA: Within the small and mid-cap space (which is our area of focus), very few companies are rated by research providers such as MSCI ESG. From our primary research, we find that many companies have sub-optimal corporate governance standards. This inevitably presents a range of opportunities for us to engage on.
ESGI: Do EM companies engage in ESG reporting to the same extent as developed markets companies?
UA: Whilst there are some pockets of excellence, on the whole, many companies lag their developed market peers. Where there is ESG reporting, this is often not in line with international best practice nor is it externally audited. However, this is an engagement opportunity for us – it allows us to assist companies in catching up with their developed market peers. One example of outstanding disclosure is in Thailand within the corporate governance space. Many companies in Thailand disclose greater detail on issues such as board evaluations. Whilst in the UK, you will merely find a statement in the annual report stating a board evaluation was conducted, in Thailand, you will receive the results of the board evaluation in an annual report!
ESGI: What are the problems associated with EM ESG ratings? Is the coverage good enough or are there methodology and standardisation problems?
UA: The problems with EM ESG ratings are no different to developed markets in that there is inconsistency, a lot of the data is backwards looking and there are wide discrepancies between different providers.
ESGI: Which of the ESG elements are improving at the fastest rate in emerging markets?
UA: We find that governance standards are dramatically improving. In particular, in markets such as Korea there are a number of governance reforms which are impacting capital allocation decisions. We find that companies are starting to think and communicate more strategically on capital allocation decisions.
ESGI: What are emerging market companies doing to address ESG issues? Is there pressure from stakeholders?
UA: It is difficult to generalise. In the small and mid-cap space, we find there are very few international investors who have engaged with companies on ESG issues. In some jurisdictions such as Korea and South Africa, local pension funds are increasingly exerting more influence over companies.
ESGI: Is there any difference between regions such as Asia, Africa and Latin America?
UA: Governance codes vary in every country so similar to above, it is hard to generalise on a regional level. For example, within Africa, there are many differences between companies in Rwanda and South Africa. Having said this, we have found it more difficult to engage in China and parts of the Middle East. We spend a lot of time studying the company and their receptiveness to engagement.
Usman joined Mobius Capital Partners after consulting on sustainable investing for East Capital in Stockholm, Degroof Petercam Asset Management in Brussels, and for a single-family office in London. He previously worked as an Investment Analyst at Caravel Management on a concentrated emerging and frontier markets sustainability fund (now part of Goldman Sachs Asset Management). Usman graduated from the University of Hull with a BA in Philosophy, Politics and Economics. He has published on ESG investing in emerging and frontier market equities for the Journal of Applied Corporate Finance, Routledge, and the UN Principles for Responsible Investment (PRI). He serves on the ESG Working Group for the Emerging Markets Investors Alliance. Usman used to be a Member of the UK Youth Parliament, and in 2009 was part of the first and only external group to debate in the House of Commons chamber.