CASE STUDY

ESG Emerging Markets Equity

Nordic family office | October 2017

Engagement at a glance

This Nordic Family Office sought to identify a minimum of two active global emerging market equity managers, explicitly incorporating ESG considerations, and invest US$280 million split equally.

 

CLIENT-SPECIFIC CONCERNS

The investor was keen to review their incumbent emerging market equity managers as part of the search for appropriate managers.  As well as certain concerns around historical performance versus expectations, central to this review was the investor’s objective of formally incorporating ESG into this configuration. Their initial view was that at least one of the incumbents was falling well short on this dimension.  Top-down/macro capabilities were also viewed positively for this mandate.


Outcome

  • The managers’ proposals varied greatly with respect to ESG “labelling”: some strategies explicitly were named as “ESG” (and/or “SRI”, “Sustainable” etc), while others were not. It is key to employ a specialist assessment of ESG capability to identify those strategies which genuinely incorporate ESG considerations in a material fashion; reliance on ESG labelling is overly simplistic and may increase the risk of overlooking managers that in fact exhibit strong ESG capability.
      
  • The client’s requirements around ESG were sophisticated and nuanced. It was therefore important to draw out the individual approaches managers undertook to ensure these were as closely aligned to the client’s needs as possible.  bfinance therefore employed a two-stage ESG assessment approach, with an initial screen followed by an in-depth, multi-dimensional qualitative review of ESG capability.

  • Beyond ESG considerations, it was crucial to ensure that the managers shortlisted by the client were also exceptional from an investment perspective, particularly given the issues the client had experienced within its existing configuration.

  • After detailed qualitative comparison and due diligence, the client appointed one new manager with materially improved ESG and investment credentials. In addition, having gained comfort through the comparative process, the client retained one of its incumbents. With respect to that incumbent, the search provided an opportunity to positively re-set expectations around ESG, and negotiate a more attractive fee structure thanks to a competitive tender process.

Our specialist says

  • While the sophisticated integration of ESG considerations in developed market equities has progressed substantively in recent years, meaning investors have an attractive level of choice in that space, the story in emerging market equities is still evolving. An important dynamic is that there is still relatively limited availability of ESG-related data in the emerging markets when compared to the developed markets. The way in which managers deal with that data challenge represents a significant differentiator in terms of our ESG. Those that are proactively dealing with these weaknesses, such as developing in-house ratings rather than relying on external suppliers, will tend to score more favourably.

}