In recent years, Asian companies have felt a greater need to improve their ESG credentials in order to stay relevant, according to Amol Gogate, emerging market fund manager at Carmignac.
“Today, if you are in emerging Asia and have good-quality governance, the valuation multiples you get are so much better. Any entrepreneur who truly wants to create value will adopt good governance standards,” he says.
“This is not a government initiative. It is happening because the markets are evolving. If you want to make money, your governance has to be of higher quality. We don’t see that as much in Europe, where there’s a lot more of a governmental push towards this.”
While this is good news for UK-based fund managers, there are additional hurdles to contend with, however, particularly further down the cap spectrum. Hicham Lahbabi, deputy head of Asian equities at Amundi, notes that although ESG is a key focus for many younger emerging market small caps, it can be difficult for western investors to determine whether they really are sustainable investments or not.
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He says small-cap companies often do not have the same structure in place for areas such as corporate governance, or to formally implement plans for sustainability efforts such as a net-zero transition.
“Also, some of those names haven’t started their net-zero journey. For now, they have to be fully focused on their one product or their niche market, and can’t afford to allocate resources to something other than the business itself.
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“So, for investors, if ESG is something that is very important, smaller caps are at a disadvantage versus large caps because they still don’t have the resources internally to work on that and give investors as much comfort as large-cap companies can.”
Gaurav Narain, manager of the India Capital Growth fund, which as of November held 47.8% of its portfolio in small caps and 38.9% in mid caps, says regardless of governance policy, companies of varying sizes are recognising the importance of ESG in order to be seen as a market competitor.
To read more, visit the February edition of Portfolio Adviser Magazine