Our mission is to champion Asia investment solutions designed to build wealth for our global clients over the long-term. As an engaged shareholder in our portfolio companies, we seek to foster their sustainability—and profitability. We also strive to be good global neighbors and citizens. We believe Asia’s growing inclusion in global financial markets can help drive the growth of Asia’s regional economies, laying the groundwork for continued progress and development in countries where we invest. This progress requires a healthy environment where people can live and work. Progress also requires a broad middle class supporting economic growth and social inclusion. Additionally, economic progress is supported by transparent corporate governance structures that can help attract domestic and international capital. While working diligently to help our clients reach their financial goals, we are mindful of the role of capital in shaping the world we want to live in.
Environmental, social and governance factors are often synonymous with long-term investing. Accordingly, ESG factors tend to be highly compatible with our bottom-up, fundamental investment process. We see at least two potential benefits to investing with a long-term view. Companies focused on the long-term may be better equipped to identity future growth opportunities ahead of competitors. This helps companies invest in research and development, production and marketing resources ahead of time and proactively create new growth opportunities or benefit significantly when those opportunities materialize. In addition, companies that look ahead can scan the horizon for long-term threats to their businesses. These forward-looking companies can potentially invest in mitigating strategies and address material risks to their long-term prospects more effectively.
Corporate governance is the ESG factor we look at most closely across all our portfolios. We believe governance influences social and environmental factors, providing a starting point for analysis. Poor corporate governance will most likely exclude a company from consideration for our portfolios. However, we generally do not employ negative screens based on environmental or social factors. In addition, our portfolios are typically not constrained by sector or industry, and often look quite different from our benchmarks. In-depth knowledge of local markets helps us to evaluate and prioritize ESG-related risks according to their potential impact on portfolios. In some of our portfolios, ESG considerations may rank high. In other portfolios, ESG considerations may be simply one set of inputs among many that we consider as part of our fundamental research.
Good governance is important in all markets where we invest, and especially so in emerging and frontier markets. When assessing management quality, we look at how well a company articulates and executes its long-term vision. We believe high-quality businesses run by capable and principled managers are healthier and more sustainable. Our business-quality assessment also includes determining the ability of a company to grow sales and profits with attractive returns over the long term. We require trust, transparency and accountability from our investee companies. As part of our proprietary investment research, we typically consider a company’s:
- Track record for allocating capital
- Board quality, diversity and composition
- Alignment of incentives for major shareholders, minority shareholders and managements
- History of protecting minority stakeholder rights, especially in a crisis
- Ability to attract and retain talent, and
- Exposure to regulatory, market and other risks.
To help develop a 360-degree view of investee companies, our due diligence process includes meetings with one or more of the following stakeholders: company management, employees, customers, suppliers, research and civic organizations. This helps us to gauge the strength and quality of management teams, as well as the viability of a company’s business model. We may also consider a company’s potential for successfully entering new areas of business by leveraging existing strengths. In markets that are rapidly growing and still inherently inefficient, we believe identifying companies with strong corporate governance is essential to help manage our clients’ investments.
In addition to identifying risks, ESG factors can help to identify opportunities. As incomes rise across Asia, domestic consumers will naturally seek to improve the quality of their lives, creating opportunities for businesses alert to this trend. Governments across Asia are also focused on improving the quality of their economic growth, which may involve closer regulation of environmental and social issues. We believe Asia’s response to ESG challenges will have a major impact on businesses worldwide. Companies that ignore consumer preferences may miss out on business opportunities, while those that ignore regulatory risks may face higher regulatory costs and risk damaging their brands. In contrast, companies with strong or improving ESG track records may find it easier to attract capital from increasingly sophisticated, institutional capital market participants.
Through our fundamental approach to investment research, we seek to understand our portfolio companies very well. In some cases, we may consider companies that faced ESG challenges in the past but are now improving. Inflection points, such as companies taking positive steps to improve their corporate governance structures, can present attractive buying opportunities. As a result, we are open to investing in technologies and industries that can help bridge the gap toward better ESG solutions, but only after careful research, analysis and due diligence.
Matthews Asia ESG Strategy
The strategy seeks to meet its investment objective by investing in well-governed Asian companies that we believe make human or business activity less destructive to the environment, as well as businesses that promote positive social and economic developments. The strategy also invests in companies that proactively manage the long-term risks associated with these challenges. It is both a positive outcome oriented strategy, as well an ESG integrated strategy. As of the end of 2019, this strategy's AUM represented approximately .2% of the firm's total AUM.