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Women-led activist firm bets on ESG reforms in emerging markets

ESG continues to gain traction as an investment strategy.
Teresa Barger, chief executive officer and co-founder of Cartica Management. Image: Bloomberg

A majority women-owned activist investment firm is pressing emerging-market companies for changes in the belief that more responsible management will generate better returns.

Washington DC-based Cartica Management sees opportunities for environmental, social and governance investment in countries where such principles are less advanced, according to Emily Alejos, the firm’s chief investment officer. Cartica, which manages about $1.2 billion in assets, focuses on small- and mid-cap stocks mainly in Brazil, China and South Korea.

ESG is gaining traction as an investment strategy, especially given its outperformance amid the recent coronavirus-led market turmoil. BlackRock Inc. noted that 88% of sustainable indexes did better than their non-sustainable counterparts in the first four months of 2020. And demand is growing, with nearly 85% of US institutional investors surveyed by Morgan Stanley saying they are interested in sustainable strategies.

The need for ESG investing is even greater in emerging markets, Alejos said in a telephone interview, as “oftentimes they don’t have regulations in place to ensure enforcement of good policies and good practices.” The company declined to share information on its investment returns.

Friendly approach

Founded 12 years ago by former emerging-markets and governance specialists at the International Finance Corp., Cartica has tried a “friendly approach” toward activism, Alejos said. With women making up more than half of its investments team, the firm has encouraged companies to elect female board members.

“We have had success where a company has an all-male board and we had recommended to have at least two women,” Alejos said, without specifying the company or country. The firm has so far been unsuccessful on this issue in South Korea, where women comprised just 3.1% of board membership in 2019, the lowest among 39 countries around the world, according to research by Credit Suisse Group AG.

There was one instance where Cartica pushed a Korean firm to improve its dividend policy and the company raised the issue to its board, which Alejos already considers a success.

Overall, Alejos said the firm is positive on South Korea for its “nice combination” of developed-market characteristics, stable economy and currency, good policy framework and attractive valuations. Cartica favors the country’s gaming, Internet and social media sectors, she said without mentioning specific companies.

Big opportunity

The opportunity for growth in socially responsible investment is high. ESG investing accounts for just 0.2% of total assets under management in South Korea, 1.4% in China and 0.6% in Brazil, according to data compiled by Bloomberg. Those are all far below levels of in Europe, the US and Japan.

There is no conclusive evidence that sustainable funds consistently perform better or worse than other funds, and a lack of consistent methodologies and reporting standards makea it challenging for investors to incorporate ESG principles, according to an October report from the International Monetary Fund. But fund managers like Cartica expect investors to increasingly press companies for changes.

“The trend of acceptance of ESG globally is improving significantly and dramatically,” and not just for investors, Alejos said,. “It is critical to every company in how they can be successful and create a sustainable business model.”

© 2020 Bloomberg

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That is positive although you don’t have to dig deep to unearth the ‘ESG wash’ in a lot of false claims corporates make including the likes of Nestlé, Proctor and Gamble, Unilever etc, as there is no governing body on ESG so companies make it up and claim it.

Socially responsible investment is not a function of the investor or the board even. The sex, race or political affiliation of board members is irrelevant. The customer is king. The customer determines the profitability of an idea. ESG is determined by the customer and the employee. The customer and the employee form the society for whom socially responsible investment is important. Any company that allows a board member of a particular race, sex or minority group to determine company policy and influence the business model to move away from what the customer and the employees want, will fall victim to the wonderful and relentless process of natural selection. The first function of a business is to add value to capital investments in a sustainable manner. The customer determines the return on capital. The customer, and not the board, determine the level of social responsibility.

It is strange how the socialists want to prescribe to entrepreneurs how they should run their business, instead of them starting their own business with this idea of theirs. If their ESG idea had any value at all, it would provide them with a distinct competitive advantage. They can make millions with this idea of social responsibility. Their belief in their own idea is not strong enough for them to take the risk and apply the capital to test their idea. So, without having any skin in the game, and without taking any risks themselves, they force the entrepreneur to apply his capital and take the risks. They don’t start their own business, but they use social justice as a crowbar to break into the boardroom of an established business to demand a seat at the table. This is not entrepreneurship, this is parasitism.

Free-market capitalism lets the customer call the shots. The socialists cannot stand the idea that the customer is king. The socialist prescribes to the customer what his likes and dislikes should be, what his priorities should be, and then he forces the customer to pay the additional cost of social responsibility. What about the rights of the customer, where is his freedom of choice in this debate?

ESG Investment in South Africa will fail. Long-term positive returns and long-term impact on society, environment and the performances of businesses in South Africa is a ‘’pipe-dream’’.
BEE and all its ‘’gate-keepers’’ will jump in first and demolish these companies, just ignoring the ANCs own regulation policies – what’s left thereafter, will end up on the rest of the cadre’s corruption list!

End of comments.





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