Fund Firms Tap Ethical Emerging Market Stock Drive
Date: 16-Mar-10
Country: UK
Author: Claire Milhench
Fund firms are creating sustainable investment emerging market equity strategies to meet pension fund demand for diversified portfolios with higher corporate governance standards.
Recent launches of products by F&C Asset Management, Bank Sarasin and BNP Paribas/Fortis have shown asset management companies are more confident they can find the companies to deliver on a notoriously difficult goal, even if obtaining the necessary data remains tough.
"Trying to find stocks that meet the corporate governance standards and get hold of the social and governance data is the biggest issue," said Francois Perrin, a senior portfolio manager in the sustainable investment team at Fortis.
Demand for sustainable investing and ESG (environment, social, governance) strategies has risen as more institutional investors have signed up to the UN's Principles for Responsible Investment (UN PRI), which now has 199 asset-owners on board.
"Pension funds have to show they are becoming more active owners, promoting higher standards of disclosure from companies and trying to integrate ESG across the management of their assets," said Danyelle Guyatt, a principal with the responsible investment team at consultants Mercer.
Growing membership of the UN PRI has coincided with a thirst for emerging markets as institutions hunt the diversification -- and sometimes more attractive returns -- that such exposure can bring, making a solution to the ESG data bugbear essential.
DUE DILIGENCE
Managers often rely on third-party ESG data providers in developed markets, but their coverage of emerging markets is still quite light, meaning managers have to do their homework.
"There is no substitute for rigorous due diligence like you would apply with any emerging market stock," said Perrin.
Guyatt said Mercer had led a search a few years ago for an ESG-friendly emerging markets manager for Dutch pension fund PGGM, but it was hard to find a good one at that time.
"In the end they didn't appoint anyone, they just decided to do it in-house. But standards have improved a lot in the last two years," she said.
Fidelity's Anthony Bolton has given an upbeat assessment of governance in China as he prepares for the launch of a new fund, but with a caveat attached: "The good companies are as good as anything you get in the UK and Europe," he has said, "and the bad companies are probably quite a bit worse."
F&C has just launched a new ESG emerging markets strategy and Alexis Krajeski, F&C associate director for governance and sustainable investment, said there is now more transparency and consistency in emerging markets, and a greater understanding about the importance of sustainability to business strategy.
"Without that information it would have been quite difficult for us to credibly launch this strategy," she said,
F&C sets minimum ESG standards for a company to qualify for the fund, but it doesn't have to tick every box. "Once it is in the portfolio, we consider it an ongoing relationship and will work with them to help them improve," said Krajeski.
Mercer's Guyatt said funds which focus on engaging with companies rather than avoiding them, are getting popular with pension funds. "If you're avoiding a lot of companies there's a risk it could have a detrimental impact on performance."
Fortis takes a best-in-context approach, to identify companies that are doing something as opposed to nothing. But Perrin said the team does turn down a number of names that are interesting from a financial point of view because they don't meet its responsible investing data requirements.
Lead manager Urban Larson said that of 160 stocks proposed at the outset, 100 were approved, a universe he believes is now big enough to support a sufficiently diversified portfolio.
(Editing by Simon Jessop)
