An investment focus on ESG analysis

Ross Teverson, Head of Strategy, Emerging Markets looks at how an analysis of environment, sustainability and governance (ESG) issues can inform the bottom-up analysis of stock opportunities.

Our emerging markets team, like the other investment desks at Jupiter, has the benefit of an experienced team of environmental and sustainability investors, as well as a dedicated team focused on corporate governance. They provide valuable support and we sit near both teams on our investment floor, speaking to them for guidance as relevant ESG issues arise. It is important to note, however, that on a company-by-company basis we are empowered to make our own assessments and integrate ESG principles into our distinctive investment approach.

Looking deeper than simple screens
We take a pragmatic approach to measuring ESG factors, seeking to be both qualitative and quantitative without falling back on simplistic portfolio-level scoring or screening on ESG criteria. Instead, we place greater emphasis on direct contact with company management – an approach which is in line with our broader investment philosophy of preferring meetings with management, whenever possible on their own turf. To this end the team carries out around 1,000 company meetings and calls per year.

A wide array of ESG factors
The terms “ESG” covers a wide range of factors that can apply differently in different sectors or parts of the world. We tend to think of these factors in six categories: environmental, communities, customers, suppliers, regulation, and employees. Each of these can either be a source of opportunity or risk for individual companies depending on the circumstance. Below are just some examples.

Environmental – Air Arabia leading the way
Air Arabia is a UAE-based budget airline with a young fleet of aircraft, comprised entirely of Airbus A320s. These newer aircraft result in superior cost competitiveness and produce less CO2 emissions than legacy models, meaning that Air Arabia is better able to mitigate its environmental impact than most other airlines. In addition, they’ve equipped half of their fleet with wing sharklets, which are devices that reduce fuel burn, particularly over long-haul flights.

Communities – Seplat dealing with adversity
Seplat is a Nigerian oil company whose main oil terminal had been besieged by militants. Following the provision of a benefits/training and employment scheme in the local area, however, the problem of militancy in Nigeria’s Delta region has dramatically reduced, allowing Seplat to focus more attention on its core business operations and benefit from rising export volumes.

Regulation – Kenya Commercial Bank feeling the squeeze
The Central Bank of Kenya has placed limits on the interest rates which banks like Kenya Commercial Bank can charge its commercial customers. While this represents a challenge for the banking sector as a whole, Kenya Commercial Bank is much better positioned than most of its competitors. The company benefits from low cost deposit funding, which means that it has been able to maintain a high level of profitability, even in a more regulated environment.

The diversity and geography of those examples illustrates the range of opportunities we see across emerging markets when considering ESG issues.

Governance in emerging markets
Governance practices in emerging markets have improved a lot over the years, in our view, but we still feel it pays to devote research time into understanding the governance picture behind a company’s stock price.

Despite the progress that has been made, a misalignment of management and minority shareholder interests is still not uncommon in emerging markets, where a significant number of companies are controlled either by a founding shareholder or a government body. So we work hard to understand how management are incentivised and what motivates key shareholders.

Such analysis and understanding are of particular importance to us as our investment philosophy is predicated on investing in positive underappreciated change, and governance issues can be a powerful source of that change.

Advocating for change
Where there is reason to believe that engagement can make a difference and create value for our clients, we work together with Jupiter’s Corporate Governance team to engage with companies. At every step of that process we never lose sight of the fact that we are looking after clients’ capital and we have a responsibility to ensure company management deploys capital and cash flow in a sustainable way that protects the interests of all shareholders and maximises long-term returns.

To take just one example of where we are taking action on governance, we have been advocating (in collaboration with some of our peers) in meetings with a Chinese industrial automation business for the company to hold Annual General Meetings. Under its listing structure it isn’t obliged to hold AGMs, but we believe AGMs are an important part of transparency and engagement for shareholders – we secured a face-to-face meeting in London with the company chairman to discuss the matter further and believe that the company will take steps to address our concerns.

Representing our clients’ interests
The assessments we make of ESG factors when researching a stock, or the action to engage on those topics we take when meeting with company management, have the clear and simple goal of enhancing long-term returns for our clients. That’s part of the reason why at Jupiter the responsibility for engagement with companies is led by the fund management teams.

So when we examine whether, for example, an industrial company is striving to make its facilities more energy-efficient, we’re not concerned about that just because being environmentally-friendly seems like the right thing to do. It matters because cost reductions affect the company’s bottom-line and attention to operational details is a sign of a well-run business. Likewise, if we question a family-controlled business about diversifying its management structure, we’re not just going through the motions, because we truly believe that the right governance structures can help to align business decisions with shareholders’ long-term interests.

That’s the point, really. When fund managers say that ESG analysis is a part of their investment process, we think it shouldn’t just be a box-ticking exercise as part of due-diligence. Instead it can be a key source of added value through bottom-up analysis and stock-picking.

For more information visit jupiteram.com or search JUPITER GLOBAL EMERGING MARKETS.

Important information

This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors.

This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.

The views expressed are those of the author at the time of writing, are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and are not a recommendation to buy or sell.

Jupiter Asset Management Limited is authorised and regulated by the Financial Conduct Authority and its registered address is The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, United Kingdom.

No part of this commentary may be reproduced in any manner without the prior permission of Jupiter Asset Management Limited.

 

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