Our assessment of an issuer’s ability to manage ESG successfully is integral to our determination of its fair spread. Both governments and corporate management that can demonstrate strong ESG credentials are more likely to boost economic development and financial performance over time. Consequently, ESG factor analysis is integrated into our investment process. It acts as a form of risk management and alpha generation. We also consider it part of our fiduciary duty as stewards of our clients’ capital.
Portfolio managers score each issuer by asking two questions for each of the environmental, social and governance aspects: 1/ the issuer’s current level of performance against global best ESG practice and 2/ the quality of their policies and initiatives designed to improve their ESG performance. The issuer is scored for each of the six questions on a scale of 1 – 5 (very poor to very good). The portfolio manager / analyst explicitly records their view in a dedicated ESG scorecard. Scores are reviewed at a minimum every 12 months.
With more than 90 investment staff dedicated to Emerging Markets, Ashmore has always relied on its own proprietary research. The approach to ESG analysis relies on a similar process, Portfolio Managers use a variety of external secondary data sources, which are complemented by research visits and meetings with issuers, which add depth of understanding, and substantiate the secondary data. For Corporate (non-financial) issuers the data areas used by portfolio managers to assess issuers are listed below:
Environment: Global impact and GHG emissions, local impact and water and waste management, incidents of environmental pollution, energy management, and use of green energy, policies and innovations to limit negative impact.
Social: Employee diversity and inclusion, customer welfare, human rights and community relations, labour practices and health and safety, supply chain management, materiality of philanthropy spend, product quality and safety.
Governance: Transparency and disclosure, governance structure, minority interest fair representation, public listing and report, management accessibility, long-term incentive scheme KPIs, strategies to mitigate the impact of ESG risks.
In keeping with our process, the investment thesis report, including the ESG score, for an issuer is reviewed, challenged and agreed at the relevant theme sub-Investment Committee. The ESG risk / opportunity is incorporated through financial estimates and/or the valuation assessment. Taken in combination with other macro and micro economic risk drivers, investment time horizon, liquidity considerations and the investable universe, ESG risk assessment therefore has a direct impact on our investment decisions and portfolio construction.