With investing to meet environmental, social, and governance (ESG) goals, it pays to know the differing political, legal, and institutional risks in each country. This can be a daunting task.
Investec, for example, takes a candidly different approach to sub-Saharan Africa and Indonesia when engaging in each region, IPE recently reported. In Africa, Investec assumes a more supportive client-type role, while Indonesia’s societal differences mandate a different strategy. “Indonesia is making a lot of social progress but there is a lot of infrastructure planned, which leads to issues around land expropriation and loss of biodiversity,” Peter Eerdmans, co-head of EMD at Investec Asset Management, told IPE.
The CFA Society recently explored critical elements that make the Middle East unique when considering ESG mandates. One thing to “understand about the integration of ESG in the Middle East is that it is subordinate to Islamic Finance in which capital is raised and invested in accordance with shariah law,” said Matt Orsagh, director of capital market policy at the CFA Institute.
Investors can find opportunities for alpha generation if they come to grips with different institutional frameworks in any given society, Cathy Hepworth, co-head of EMD at PGIM Fixed Income, said in IPE’s report. “Venezuela is a strong example where a poor social and governance outlook caused us to be underweight sovereign paper versus collateralized quasi-sovereign debt. Ukraine was a more positive story, where improvements in social and governance conditions led us to increase our weighting in that country prior to its 2019 rally.”
Acclimating to such structural differences among the regions causes individuals to determine how they’ll learn about them. There are different intelligence providers to choose from, and many times firms rely on their own research. IPE reports that Rob Drijkoningen, Neuberger Berman’s co-head of emerging markets debt, uses a combination of third-party ESG indicators and internally generated ones.
Assets managed in ESG are soaring around the world, with the largest 500 asset managers increasing their positions by 23.3% in 2018 compared to their overall assets, according to a report by Willis Towers Watson’s Thinking Ahead Institute.
Other countries are ramping up with regards to their ESG programs. The Asset recently reported that the “Monetary Authority of Singapore (MAS) announced during the Singapore Fintech Festival that it has established a US$2 billion green investments program (GIP) to invest in public market investment strategies with a strong green focus.”