UBP’s expert Mathieu Nègre explains why impact investing in listed emerging equities is a significant investing opportunity for at least two reasons.
First, emerging countries tend to lag behind developed ones when measured against the UN SDGs. That means that the potential for improvement is higher, and the growth runway for companies providing what can sometimes be perceived as “basic” services a lot longer. We have examples of companies in Brazil and the Philippines, for instance, which enjoy significant growth rates by connecting new areas to water or electricity networks, thereby providing important services to previously neglected consumers, and a springboard for future development.
Second, the governance and regulatory environment is generally less robust in emerging countries. At the corporate level, sustainability reporting can be unavailable, or less comprehensive than one would expect in Geneva, Tokyo or New York. That is both a challenge and an opportunity. The challenge is that we sometimes struggle to establish a genuine dialogue about sustainability with the companies we research. We regretfully have to exclude companies with great impact potential as they don’t reach our governance standards. On the plus side, it is easier for us to make a difference.
Many of the companies we engage with are at an early stage in their sustainability strategy and are happy to take suggestions from investors.
In the most extreme cases, we have talked to companies with a genuine positive impact, but who had never thought of it as such.
It is also interesting to keep in mind that the opportunity set in emerging markets is different from that in the developed world. There are more companies listed in emerging markets that target education, clean energy or financial inclusion. If you take the latter as an example, most of the financial services requested by consumers in, say, Western Europe are offered by banks and trendy fintech companies. But in Latin America, Africa and Asia it is possible to get exposure to companies specialised in microcredit or the financing of very small enterprises. Those companies tend to have a greater impact per dollar invested thanks to the purity of their business models.
Symmetrically, it is more difficult for an emerging market investor to find opportunities in technology and in our healthy ecosystems thematic. As far as technology is concerned, we have to accept that certain research-intensive sectors will, for the time being, be hard to reach for emerging market investors: these sectors require a level of cumulative research and access to capital that is rarely present in emerging markets (with notable exceptions, such as technology hardware or internet services). Regarding ecosystems, we will need to see more local regulation and an increase in consumer demand for sustainability for this sector to develop outside high-income countries. Until then, there is already a lot to do in areas of emerging equities that can offer diversification benefits to the global impact investor.
Mathieu Nègre
Head of Global Emerging Equities
