MILAN, Aug 5 (Class Editori) – We consider frontier markets as the next generation of emerging markets, which should follow the path taken by EMs in terms of economic growth, income level, depth and breadth of capital markets, regulatory framework and liquidity. The starting point of our investable universe includes the countries part of the MSCI Frontier Markets index, such as Vietnam and Bangladesh in Asia, Kuwait and Morocco in the MENA region, Nigeria and Kenya in Africa, as well as Romania, Slovenia and Argentina in the East Europe and Latin America. In addition, we consider smaller emerging markets as Egypt and Pakistan, given that they have great growth potential in the future. We believe that be out in the field identifying secular trends and conducting in-depth internal research, together with the integration of ESGs, are key elements of long-term success in frontier markets.
We think that the investment in ESG covers both the journey – that is the process – and the destination – that is the outcome. There are of course several challenges in the ESG investment in frontier markets, ranging from financial reporting in English to the formation of well-balanced and diversified Boards of Directors, from being environmentally friendly to contributing to the UN Sustainable Development Goals (SDGs). However, we consider the development still limited as an opportunity to make a more significant contribution, identifying those companies with strong and open-minded management teams, so as to establish continuous communication to improve ESG standards.
It is difficult to express an opinion on one market rather than another, given that there are huge differences between individual companies. In some markets we find several blue-chips at opposite ends of our sustainability classification (ESG Scorecard). However, when ESG issues are brought to the attention of companies, the answer is usually positive. It is indeed understood that the issues raised by investors like us play a key role for their own future.
Although, as mentioned, individual companies need attention, in some countries such as Turkey and South Africa, the regulatory framework certainly offers companies great incentives for reporting, investor relations and even for the structure of the Boards of Directors and attention to the environment. In addition to the regulatory aspect, a consolidated base of local and foreign institutions is essential to push companies to implement more sophisticated standards. In frontier markets, it is a slower process. We as investors need to address a number of issues that affect both regulators and individual companies, and consequently we must be relatively patient pending the expected results.
The adoption of the ESG analysis and active ownership led to the achievement of tangible results, such as the increase in dividends distributed by the companies and the improvement of the structure of the Boards of Directors. In general, we aim achieving changes that make societies more sustainable through small steps, making us patient in achieving long-term changes. Asking a CEO for a sustainability report, deepening the background of the members of the Board of Directors, asking for further information on how the company contributes to the SDGs or, more fundamentally, requesting financial reports in English, can be repeated over and over again without a clear result, and it may not seem like a big change. However, we think that every step counts and that adopting an ongoing commitment with companies will, over time, result in visible achievement: tangible changes, better information communication and higher returns for all stakeholders.
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