Applying environmental, social and governance filters when investing in emerging markets isn’t easy given challenges such as a lack of company transparency, varying governance structures and the availability of clear and comparable data.
But that doesn’t stop Sébastien Thevoux-Chabuel, an analyst and portfolio manager at Paris-based Comgest and a speaker at the 2018 Responsible Investment Association conference in Toronto this week.
During a session on responsible investment in emerging markets, Thevoux-Chabuel conceded that data “is not easily available” and noted there can be great risk when applying environmental, social and governance filters to them. That can include the risk of corruption. While China is improving in that regard, he said, countries such as India have more issues.
There can also be labour rights and environmental protection issues, given the varying regulatory structures encountered, said session moderator Pierre McLean, a vice-president at Desjardins Investment.
Overall, it’s important to be “extremely careful” when analyzing emerging markets, said Thevoux-Chabuel. The way he and his firm look at it, “no company is 100% perfect.” And if investors haven’t found any issues, they “haven’t searched enough,” he added.
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The question is whether companies are moving in the right direction in terms of improving their practices. In its case, Comgest has been measuring carbon footprints since 2010. It also looks at water quality and biohazards when assessing the environmental impact of businesses.
Further, engagement with businesses is crucial, said Thevoux-Chabuel, noting Comgest rates companies it invests in on a scale of one to four, with one being the optimal score. If a company has a rating of four, “you really want there to be improvements” in how it operates and its relationships, he said.
If Comgest sees evidence of positive change, companies’ scores can improve. For example, one growing company that Thevoux-Chabuel invested in initially had a board of only three people. Based on its growth potential, he and his team suggested the company double the board’s size, a recommendation he said it acted on quickly.
In terms of sector exposure, the firm doesn’t favour divestment. Rather, it seeks to lower its exposure to sectors like oil and gas, mining, coal, construction and materials, defence, tobacco and banks.
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Why are banks on that list? In emerging markets, they’re not transparent enough, said Thevoux-Chabuel. While it’s possible to assess their balance sheets, there may be issues with non-standardized accounting practices or things an investor won’t be able to find.
“It’s hard to know where they’re making their money,” he said.
This article originally appeared on the website of Benefits Canada‘s companion publication, advisor.ca.