When taking an environmental, social and governance (ESG) angle on assessing investments, it is possible to identify risks and opportunities that might not at first be apparent by way of a traditional macroeconomic or company financial analysis. Before discussing why an ESG framework is needed for emerging-markets investors, however, it is important to address one topic at the heart of the matter: growth.
The concept of growth — whether it applies to GDP, employment, disposable income, revenue, earnings and so on — is a key factor in helping us at Investec to determine if something has value or worth.
The sheer concept of growth presupposes, however, that expansion is inevitable — and desired, for that matter. This paradigm may have some inherent flaws. For one, growth in a finite system cannot be infinite. Various philosophers, academics and policymakers have explored and extrapolated upon this construct. Recently, however, from an investment standpoint, the impact of the 2008–’09 financial crisis and the pressure from climate change and greenhouse gas emissions have brought this discussion to the forefront. With incorrect motivation behind a business strategy, growth may prove to be unsustainable and sow the seeds of its own demise. Thus the lens we use to examine ESG investing is becoming more and more important in bringing sharper focus to the concept of sustainable growth. There are numerous stories to explore regarding the quality and sustainability of growth in emerging markets. There are only so many companies that embody perpetual growth or, for that matter, survive.
The ESG framework is particularly important in emerging markets when analyzing state-owned enterprises, their role within their respective economies and their functioning as corporate entities.
In their 2011 Harvard Business Review article “Creating Shared Value,” Michael Porter and Mark Kramer provided a framework for reimagining the corporate world and pointed out the problems with a narrow, short-term focus on profit at the expense of deeper social impact and sustainable, socially relevant businesses. Core to their argument is a provocative challenge to economist Milton Friedman’s view of corporate social responsibility. They argue that today’s corporate social responsibility activities are simply a means of legitimizing a business or managing reputation and are seldom connected to the core goal of a business. More specifically, business should concentrate on corporate shared value, which, at its heart, recognizes that societal needs, not economic ones, define markets and that making a negative social impact may well create long-term internal costs or inefficiencies for the business.
In many ways, this shared-value paradigm similarly aligns well with the ESG lens that we at Investec continue to develop within our business. The creation of economic value, by investing in ways that contribute to the betterment of society, is well framed by emphasizing three key areas: reconceiving products and markets, redefining productivity in the value chain and building supportive industry clusters at the company’s location. In this way, there is opportunity to grow the total pot, rather than reallocate the existing one. Linking this back to the sustainable growth argument, such an approach again provides an additional valuable lens for trying to understand how and which businesses can grow in the world toward which we are moving.
Archie Hart, Malcolm Gray and Therese Niklasson are part of the investment team at Investec Asset Management. Therese is head of ESG research, Malcolm is a portfolio manager for South African equities, and Archie is a portfolio manager for emerging-markets equities, within Investec’s 4Factor team..
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