Reading the signals

Looking at companies in both developed and emerging markets through the lens of ESG can shed light on underlying risk, explains Julie-Ann Ashcroft

Reading the signals

Illustration by Harry Tennant

Environmental, social and governance (ESG) factors are the best signals of future risk, and are too critical to ignore. That was the conclusion drawn by Bank of America Merrill Lynch’s 2017 report ESG: good companies can make good stocks, which also revealed that investors could have avoided 90% of corporate bankruptcies since 2008 if they had steered clear of companies with low ESG ratings.

Poor corporate governance and CEOs furthering their own interests aren’t the only drivers behind stocks blowing up – there are often environmental or social issues in the mix too. The Deepwater Horizon catastrophe in 2010 wiped 54% off the value of BP, for example, and VW shares plummeted by 35% in two days after the carmaker admitted systematically cheating emission tests.

In a country where company reporting is often unreliable, Safaricom makes an active effort to measure and quantify its socio-economic and environmental impacts

These ESG factors are particularly important when considering impact investment opportunities in emerging markets. Suitable sectors include clean tech, e-mobility (electrification of trains, electric batteries for cars) and telecoms, but it’s crucial to establish how raw materials in these sectors are sourced. The mining of lithium, used in portable electronics, hybrid vehicles and grid storage, has a high environmental impact, while cobalt (used in mobile phone batteries) is problematic as 50% of reserves are in the Democratic Republic of the Congo.

Funds considering investing in these markets, such as the Standard Life Investments Global Equity Impact Fund, need a rigorous investigation process involving in-depth research. This can be a challenge – company information may be scant and skewed in favour of its strengths – which is where independent research comes in. Analysing “off balance sheet” information from stakeholders, the media and other external sources gives investors a clearer picture of whether a company’s policies actually translate into processes. How well a company manages ESG issues is a key risk assessment factor that feeds into its impact suitability.

Many of the companies that Aberdeen Standard Investments invests in are those that are making a real difference in their market by leapfrogging a generation of technology. One such company is Safaricom, a Kenyan telco provider that covers 92% of the population. Its mobile money platform, M-Pesa, is revolutionising financial inclusion in a part of the world lacking in banking infrastructure. More than half of the country’s population uses it and it has become a benchmark for telecommunications companies anywhere in the world.

Safaricom helps low-earners with short-term personal loans and savings schemes; its app also helps refugees obtain food from accredited distributors. In a country where company reporting is often unreliable, Safaricom makes an active effort to measure and quantify its environmental and socio-economic impacts in partnership with KPMG using its ‘True Value’ methodology. For these reasons it has earned its place in the Standard Life Investments Global Equity Impact Fund.

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