In recent years the importance of non-financial indicators in the corporate valuation process has become undeniable.Investors are becoming increasingly aware of the link between financial returns and environmental, social and governance factors (known as “ESG”). Disclosures linked to issues such as resource scarcity, labour rights and minority investor safeguards are being heralded as key metrics to evaluate performance.Failures at Petrobras in Brazil, Satyam in India, scandals in China and South-East Asia, but also Volkswagen in Germany, have drawn attention to the significance of this data as a proxy for risk management and ethical standards. On a more macro scale, the wider implications of climate change have become undeniable when assessing an asset’s long-term sustainability. Given global agriculture consumes 70% of the world’s fresh water and generates 20% of greenhouse gas emission, investors must evaluate whether existing resource-intensive business models are at risk from regulation or disruption.ESG and related strategies are well understood in developed markets (over 95% of sustainability-oriented investments are focused on the US or Europe). This is facilitated by the availability and transparency of data. However emerging and frontier markets continue to lag. Investors are still regularly confronted with challenging conditions exacerbated by ESG shortcomings; particularly in corporate governance. These issues cause disengagement among the investor base, which leads to a lack of pressure on management. Many investment strategies that attempt to apply an ESG approach rely on passive screening techniques that only engage with corporates that are already compliant; therefore, upside is limited. Large asset management firms often appear to use ESG as a marketing tool.According to a recent report published by Transparency International, when analysing 100 emerging markets multinationals for anti-corruption disclosure, 75% scored below 5 out 10[i]. The average score was a lowly 3.4. Frustratingly, many of the companies that had been surveyed four years earlier had barely improved their standards when re-reviewed.We launched Mobius Capital Partners to tackle this predicament by challenging the status quo through a new type of investment in emerging and frontier markets. Our goal is to reach beyond simple exclusion screens and adopt an active approach that is governance orientated. We want to be a catalyst for corporate improvement. This can be best achieved through collaboration and partnership with portfolio companies. We believe that it will have a substantial impact on non-financial indicators while also boosting companies’ operational performance over the long term. Shareholders can and must facilitate the development of an ESG pathway with companies.According to a recently published study by HSBC, since 2008, companies with improving ESG practices outperformed those who lagged behind by over 25%. This is supported by research (Dimson, Karakas and Li, Aug 2015) that found working with companies on ESG issues can have positive financial benefits. Academics noted that following successful engagement on environmental and social themes, operational performance improved by 7.1%[ii]. This increased by as much as 8.6% when the focus was concentrated solely on corporate governance. Overall the firm’s financial performance improved, it attracted a wider investor base and had lower stock volatility.Our investment strategy is founded on the principal that a deep understanding of ESG factors is one of the best ways to identify, understand and manage investment risks. We understand that improving a company’s corporate governance is central to long-term commercial success, which in turn leads to sustainable investment returns. Through our funds we aim to leverage decades of experience in emerging and frontier markets to generate sustainable returns by actively partnering with companies to improve corporate governance and enhance broader ESG standards.[i] Source: Transparency International, Transparency in Corporate Reporting: Assessing Emerging Markets Multinational (2016)[ii] Cumulative abnormal return- (Dimson, Karakas and Li, Aug 2015)
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