Travelling to less-visited destinations, getting face time, and painstakingly verifying a manager’s ESG credentials.
These are how selectors are doubling down on ESG screening for emerging market (EM) funds, that often lag behind developed market counterparts on disclosure.
Deutsche Bank Wealth Management has a ‘two-pronged approach’ for EM funds, said head of fund selection Ian Crispo.
The bank taps into databases, conferences and its network when sourcing fund managers. But it also relies on locally-based analysts and product specialists, who travel to meet managers in frontier markets such as Latin America.
Over in Asia, this job is done by analysts in India and Singapore and product specialists in Hong Kong.
Managers are evaluated on the quality of their teams, investment processes, risk management, performance track record, as well as spoken languages and local presence, Crispo said.
Disclosure levels are generally better in countries with advanced capital markets. ‘However, in our experience, disclosure is more company-specific than market-specific, as far as EMs are concerned, as ESG disclosure is still developing in these markets.
‘We rely more on the transparency fund managers are willing and able to provide,’ he added.
Meanwhile, Tsao Family Office guards against greenwashing by asking managers to explain their investment process through detailed case studies.
Even with this in place, investment director Leslie Lim still struggles to ascertain how a manager’s ESG credentials stack up.
‘Quite often, the process is a black box. It is difficult to understand or track exactly how different funds conduct their ESG research and evaluation,’ he said.
The single-family office considers two broad categories of socially responsible investment funds.
The first is traditional funds covering a geographic region or product sector, with ESG criteria built-in. The second group is more proactive in looking to make a difference.
Elsewhere, Deutsche allocates to ‘a number of managers’ in equities and fixed income, Crispo said.
This includes the Vontobel mtx Sustainable Emerging Markets Leaders fund, which considers a stock’s return onSDGs
invested capital, industry position, valuation, and ESG metrics.
By country, the portfolio had a 37.6% weighting in China, followed by Korea at 12.1%, Brazil at 10.4%, and Taiwan at 7.6%.
However, the laborious screening processes involved may be deterring allocation in this area. EMs currently make up a ‘limited’ portion of Deutsche’s ESG allocation.
Crispo said that allocation to EMs was generally based on macro, investment and technical considerations such as growth expectations. ‘ESG considerations will come more at the micro and security levels.
‘Hence, relatively-better ESG disclosure levels in EMs will certainly result in increased allocations to ESG products active in the space.’
He sees potential in a large number of asset managers coming together, to set a common approach and standards for reporting on ESG.
This could be based on the Global Investment Performance Standards, or Android in the area of personal devices.
‘The only incentive for rapid action is likely to have to come from the regulatory side. Without that, it will take some time before a common standard and approach to ESG becomes really mainstream, particularly in EMs,’ Crispo said.
Tsao’s Lim called ESG ‘paramount’ to its portfolio, while declining to reveal its allocation.
Besides being socially responsible, ESG incorporates important externalities that are typically ignored in traditional financial analysis.
‘One of the major challenges for ESG in EMs is the disclosure. Asia and EMs are lagging on that front,’ Lim said.
‘As a result, we may temporarily overlook the need for ESG solutions in EMs for the time being and wait for the market to catch up.’
This feature was first published in the March-April issue of Citywire Asia’s Private Wealth magazine.
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