JPMorgan’s Emerging Markets Investment Trust always embedded ESG in its approach. Its fundamental focus on the long-term growth potential of businesses has sustainability at its core.
ESG and sustainability have been gaining more and more attention in recent years with specific ESG funds increasingly in vogue. However, the concept of sustainability in business is not new and has long been understood by successful long-term investors.
Considering all the factors which could affect a company’s profitability and value in the future leads naturally to a broad definition of sustainability. The JPMorgan Emerging Markets Investment Trust team call this ‘duration’, a concept incorporating ‘ESG’ and more, which forms the foundation of their investment philosophy.
Why is ESG important?
There are essentially three simple reasons why, as investors, we should think about ESG:
Firstly, we all have a responsibility to consider the broader consequences of our investment choices
Secondly, ESG is important to many individual investors from an ethical standpoint
Thirdly and perhaps most importantly, it is entirely consistent with a long-term approach to investing.
On that last point, Investment Specialist Emily Whiting is clear.
‘Put quite simply, it’s because to invest long term you must have companies that do business in the right way. If they don’t, it’s not going to change their price valuation quarter-on-quarter, but year-on-year and decade-on-decade.’
ESG built in
The Trust’s approach to assessing ESG performance is built into the framework by which all companies are assessed prior to making any investment.
‘This is something that’s inherent in all our conversations when we appraise stocks,’ says Whiting. ESG is at the heart of every decision we make.’
The team takes a long-term view because they believe such an approach delivers better results, reduces costs, and allows the power of compounding to translate into investment outcomes. ESG is a key element which affects the long-term prospects of companies and as such it is very important to the team.
‘Rather than seeing ESG as something that restricts our ability to generate returns, I think of it as a necessary part of what we do,’ says Lead Portfolio Manager Austin Forey. ‘Rather than constrain our portfolios, it refines them.’
The challenge of ESG in emerging markets
Until recently, several factors made ESG-focused investing in emerging markets particularly challenging.
Firstly, a lower degree of societal pressure on companies to act responsibly. Also, clear regulation to define and enforce sustainable practices wasn’t always in evidence. Some of these factors persist, however, because the concept of duration has always been built into the Trust’s investment framework, the team has a well-defined approach to evaluating all three factors for EM stocks:
Environmental: Better reporting is making environmental performance easier to measure, with many companies now publishing sustainability reports as a matter of course. However, the team still seeks to understand if companies are actively working to mitigate risks and improve environmental performance.
As well as forming part of the strategic classification assessment, this is addressed by specific questions in the risk profile.
Social: Expectations regarding social responsibility must take into account the local context, including existing social norms, legal systems and stages of development. However, firms have a responsibility to be proactive and not hide behind these mitigating factors.
Governance: When considering governance, the team focuses on two areas: firstly, whether a company shows proper regard for the interests of all shareholders; and secondly, whether it can demonstrate proper stewardship of assets and value over time. One slightly surprising example of where companies tend to fail that first test is in South Korea, where the complicated chaebol system of family ownership often results in little regard being given to minority investors.
The evaluation process
While third party information is useful, the team conducts its own research and makes its own decisions about the sustainability of businesses before investing in them. They engage directly with companies both before and after investing, through the 5,000 meetings they conduct annually with businesses as well as through proxy voting. When sizing positions, both strategic classification and risk profile are considered.
Putting the S and G into ESG
The pandemic has brought to the fore the ‘S' and ‘G’ in ESG and accelerated a trend which the team had already identified.
‘We’ve noticed it through company meetings over the last couple of years anyway,’ says Whiting. ‘Businesses recognise its increasing importance in how they’re perceived in the marketplace, so they want to talk to us about their governance committee and what they’re doing from a social standpoint.’
The impact of COVID-19 has perhaps been most significant on social responsibility, particularly with those firms which already have a sustainable approach embedded in their corporate culture, recognising their responsibilities not only to their customers and their staff but to wider society. ‘You’ve got Chinese noodle companies providing meals for community hospitals, a Brazilian bank that’s set up a fund to help people in poverty and so on,’ says Whiting.
Overall, the team’s view is that ESG is integral to the long-term performance of companies and so should be integral to the research process. Ultimately, ESG is not just about ‘doing good’, it’s about ‘being good’ — and that benefits everyone, including investors.
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