East Capital: Sustainability to unlock Chinese opportunities
Louise Hedberg, head of Corporate Governance at East Capital has told the recent Nordic Investment Managers Forum in Luxembourg that sustainability factors are increasingly being factored into emerging markets analysis, for example, around China.
Why is sustainability not only one of the most important management challenges of our time, but also one of the most interesting?
Most of us are very aware of the sustainability challenges that we as a global community face. Climate change, natural resource scarcity, water issues are just a couple of examples. They are significant and will require collaboration between nations, between natural science and finance, between sectors and companies. The interesting part will be to find solutions. We see exciting examples of countries and companies that have clearly decided to take the lead and turn challenges into opportunities. This will make them much better positioned for the long term and a world where we will need to do many things quite differently. Companies that do not adapt or adapt too late, will at best be left behind, at worst be made obsolete. Meanwhile, they will probably make very bad investments. As investors, we need to make sure we invest in the companies that understand their role in a sustainable future, and what it will require from their long term strategies.
Any particularly good examples?
China! It is very clear that China has understood the importance of swiftly addressing and improving the very bad environmental situation in China. They have taken clear leadership in getting the Paris climate agreement in place and ratified ahead of schedule and are pioneering the green finance space. The 13th five year plan for 2016-2020, which is the central government blueprint for China’s long-term social and economic policies, makes the war against pollution a priority. This implies strong policy support and a doubling of investments into environmental protection, amounting to almost 3% of China’s GDP in 2020. It will also mean stricter implementation of regulations for the non-environmentally friendly companies, which will require companies to swiftly adopt better environmental practices.
This is also the background for us to transition our China fund into a China Environmental Strategy that solely invests in issuers that provide solutions to China’s environmental challenges, for example energy efficiency, clean air and water, renewable energy and electric vehicles. Not many are aware that China is the largest clean-tech market in the world and the investment universe of environmental stocks consists of fast-growing innovative companies and often upcoming global leaders which makes this market even more interesting.
Did the corporate governance standards improve during the last years. If yes, where particularly and what are the drivers?
Definitely. I think it is safe to say that this is something we have seen across most, if not all, of our markets.
Among other things, we see improved transparency, better alignment between majority and minority shareholders, and more professional boards. Companies simply understand that good governance is a prerequisite for all active investors today. Driving these improvements are pressure within a peer group to follow on with improvements, more and more stock exchanges increasing and accentuating their demands on governance and other sustainability issues and disclosure related to this and not least active investors who constructively engage with companies to encourage improvements and ensure that companies are held accountable to their shareholders. We spend a lot of our time meeting and engaging with companies in our portfolios and they are generally very eager to have this type of dialogues in order to understand how they can strengthen their attractiveness in the international investor community.
Are companies with good corporate governance good investments?
Good governance does not automatically make a company a good financial investment. But, conversely, there are few examples of good long term investments, where the company did not understand the importance of good governance. We clearly see that our best long term investments are typically companies that are transparent, well managed companies that understand all the risks and opportunities related to their business, including those related to environment, social issues and governance. By analyzing and assessing these factors, we can make better informed decisions, helping us to navigate around the bad investments and instead allocate capital to those companies we will believe will be able to create attractive long term returns for our clients.
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