Thank you for listening to this podcast about sustainable investing in emerging markets equities. My name is Maria , and in today's episode, better data, quality engagements and policies ensure a rapid improvement of ESG in emerging markets. Why should investors focus on ESG in emerging markets? And does that create sustainable returns? That's something we'll discuss today with Christian Silva , client portfolio manager, Asian and emerging market equities at Columbia Threadneedle. Chris hen .
Welcome. It's great to have you.
Um, first of all, thanks for having me. This is actually my first ever podcast, so I'm really excited. Um, in terms of an introduction, as you said, my name is Krisha and Silva. I am the client portfolio manager for both emerging market equities and Asian equities at Columbia Threadneedle investments. I guess in summary, I would say my job is to communicate our investment capabilities and our investment views to both existing and prospective clients in a normal year.
I'd be lucky enough to travel far and wide meeting clients, including in the Netherlands. However, this year there are no stamps on my passport and actually all my meetings are done from my very small flat in London.
Nevertheless, Christian , we are very excited to have you here. Uh, you're joining from London and me over here and that , Hey, you know, technology makes things possible. Um, let's start at the beginning of all this , uh , and maybe start with the experience that you have in managing emerging market assets.
A lot of experience, to be honest. So we've been managing EMS since the team's formation back in 2008. And since then we've had a very consistent and experienced team . So to give you an example, the average experience for the team is over 20 years. So currently we're managing just under 6 billion us dollars in emerging market assets. So actually for your listeners, that's just over 5 billion euros and that's across three main emerging market strategies.
One of which is this new emerging markets ESG strategy, and in terms of track record. So the track record for our existing strategies has been very strong. So we're really excited to have launched this new emerging market ESG strategy and build on that experience.
Great. Wonderful. Um, maybe start with the more generic question on, on Columbia Threadneedle philosophy to investing. Is there anything you'd like to share on that topic?
So our philosophy to investing really starts from the bottom up company analysis is key to everything we do from a fundamental to an ESG perspective, as well as quantitative analysis. I would emphasize we don't ignore the top down , but we always look at top down events through the lens of the company. And ultimately we're asking ourselves two questions.
How does this top down , um, event impact the company's earnings and how does it impact the valuation that we're prepared to pay for those earnings? And then in terms of companies that we look for, we call them stewards of capital. These are companies that can accelerate and sustain profitable growth, strong management teams, a competitive advantage companies with low leverage, very much the economic definition of quality.
And I would highlight one of the metrics that we pay close attention to is return on invested capital. So we're really looking for companies with a high or improving return on invested capital. And then with this strategy, we're taking our philosophy a step further by focusing on companies with strong and improving ESG qualities. And we believe these are the best companies to sustain their long-term future.
And I think what we're seeing is that the market is continuing to place more value on ESG characteristics. So by being able to identify them today, using our dedicated ESG research people or provide to RI research tool that we've, we've created over the last few years, we can really capture that alpha long-term .
Maybe you can , maybe you can share a bit more about how you then apply that philosophy in the market, actually.
So simply I would say research research research, you know, combining fundamental research with ESG and quantitative research is the key, you know , evaluating companies with what we call multiple sources of alpha. And our investment process is really built around this idea of no unintended bets. What we want to do is create an informed view of our entire universe and eliminate that idea of unintended bets. So what does this actually mean?
It means that, you know , we don't want to come in at the end of the year and see a stock that has gone up a hundred percent in our universe, and we knew nothing about it. Now, if we knew about it and decided not to invest that's okay, but not knowing about it isn't good enough. So I think the first thing we always do is we want to define what our investment universe is.
And our investment universe is defined into three distinct buckets, everything that we own in the portfolio, everything that we like, but we don't own. So we might do some price target work. We get a price upside of minus 20%. It's not great, but we will maintain coverage of these stocks. And then everything that's 25 basis points or larger in the benchmark.
Now everything in our investment universe needs to have an upside and the downside price target the upside price target isn't necessarily unique, but it's the downside price is important. Often a lot of ER managers focus on how much money they can make and they forget about how much money they can lose. And so these price targets really, they frame all the conversations that we have as a team.
You know , if a stock gets the upside price target, we're asking ourselves, should we be selling this stock? If a stock hits the downside price target, and we really liked the company, should we be buying more of this? And it's really that research intensity, combining fundamentals, ESG, and Kwon to ultimately create the upside and downside price target that allow us to apply our philosophy into the market.
You briefly mentioned is to you're ready . Um, why should investors focus on ESG in emerging markets?
That's a great question. Matter put simply ESG drives alpha. You know, it's not just a risk mitigator. The market is slowly understanding that those companies, which focus on their specific ESG exposures will generate sustainable returns. There's been many published studies on this topic and the general conclusion is three primary factors have driven performance in emerging markets when investing with an ESG focus, the first being stock selection.
So selecting stocks on ESG criteria, the second being sector allocation. So specifically underweighting sectors such as energy and materials and overweighting sectors such as technology and healthcare as ESG factors impacted these sectors most materially and finally a focused on quality with many studies pointing to the fact quality companies have better corporate governance and actually better corporate governance drives better performance over the long run.
And you know, all of this resonates with us as I discussed in your philosophy question earlier, we do build portfolios from the bottom up. We do have natural sector preferences as a result of that bottom up stock selection. And we focus on quality companies. So to answer your question, I would say investors should focus on ESG to generate consistent outcomes
And how to policymakers in emerging markets look at that. Do they care?
So policymakers definitely care. And , and for us as supportive macro backdrop can make all the difference. Now recently in September the UN general council , you had China pledging to hit zero emissions by 2060. I mean, I would say arguably the most important step in environmental policies since the Paris agreement South Korea have made similar pledges. So by 2050, they're going to hit zero emissions.
India have a goal of reaching 60% of its energy from renewables by 2030 local standards are improving. So you see stewardship codes in places like South Africa in places like Brazil and even even exchanges. So Hong Kong exchange, for example, every listed company on the Hong Kong exchange must publish an ESG report. They must disclose all environmental KPIs.
And I think that's important to recognize that that has a powerful impact on mainland Chinese companies who want to be listed on the Hong Kong exchange. So I think to answer your question like policymakers definitely care in emerging markets. In some instances I would actually argue even more so in developed markets. And so for an ESG investor, this provides a massive opportunity for us both to generate alpha and as well have a positive impact on the world that we live in.
Wonderful. And it sounds like the momentum is really there now as well with all these policies. Um , what can you tell us about the investment process at Columbia Threadneedle?
I think most investment processes are built around four key pillars. The first being screening the universe, the second being conducting research, the third portfolio construction and the fourth monitoring the portfolio. So what we want to do with this investment process is systematically incorporate ESG at every stage. When we screen the university ideas, we utilizing our proprietary ROI ratings tool to continually identify companies with either a high or improving ESG qualities.
We're also screening out companies with exposure to controversial weapons, gambling, adult entertainment, alcohol, tobacco, coal, and nuclear power. Furthermore, any companies with breaches of the UN global compact or any company that's rated triple C and M a CIS ESG rating are also excluded.
Then in terms of research, the idea here is to apply our philosophy of no unintended bets that we discussed earlier, really combining fundamental ESG and quantitative research with the ultimate end goal of creating upside and downside price targets on our defined investment universe. Then in terms of the third pillar portfolio construction, we are mandated to be positively tilted to ESG characteristics. So specifically we have to be positively tilted to our internal ESG score.
We have to be positively tilted to carbon characteristics. So this is both emissions or intensity. We have to be positively tilted to the UN global compact 10 principles. And lastly, we have to be positively tilted to MSEI as ESG score, but what does that actually mean in real life? Well , we have to prioritize companies that score well from an ESG perspective. So all else being equal.
If we had two companies we liked and one scored better from an ESG perspective, that company would either be a larger position size or be the entire exposure. And then the final pillar in terms of monitoring our data science team have built an online dashboard where we can view the portfolio through an ESG lens in real time. And then from a client's perspective, we can create bespoke reporting for that client's requirements such as reporting on emissions or reporting on ratings amongst others.
So in the entire process , uh, Christian , uh, clearly , uh, what always makes it easier if you can sort of give us an example of what then that actually looks like in practice. So we get a better picture of how it works.
Yeah. Um , I would love to talk, talk stock examples, but for compliance reasons.
Yeah . But
You know , themes wise, definitely we can give some examples of that . The semiconductor space, for example, is really interesting. You know, the application of semiconductors goes far and wide from electronic vehicles to renewable energies. And there are companies in this space that are focused on environmental manufacturing, which place a lot of emphasis on say, materials , sourcing or waste management or water management, energy usage.
Um , you know, we're investing in companies where we're seeing a lot of innovation where they're spending a lot on R and D, particularly at that leading edge of Foundry. Now, one of the companies that we, we own having an amazing management team with a pristine governance track record, and actually what we're seeing is they're setting the standard for the whole industry.
Not only in semiconductors online education is another area that we're very constructive over and, you know, online education can be key to drive social mobility. Students from anywhere in the world can now have access to some of the best tutors at a fraction of the cost of what it was historically. And actually this idea of online education is an important one to , to emphasize another point that it's not just about focusing on ESG on its own. It's about combining fundamental and ESG.
So recently we had a company that we owned and actually the ESG score deteriorated. And the reason for the score deteriorating is it said , um, that there was a lot of cash burn on the balance sheet. So from a governance perspective, the score deteriorated, but actually from a fundamental point of view, what we understood was the company was investing in building their digital platform and this wasn't being captured by the ESG scoring.
So actually what we wanted to do is increase our exposure to this company because they were setting up this platform for long-term sustainable returns. So I think the important point that I would like to make here is it's not just about focusing on ESG solely is about combining ESG and fundamentals.
And are there any challenges or maybe risks that are attached to ESG in emerging markets?
I think the biggest challenge we face is around data and it's data.
Availability is data quality is data materiality, but I have to say standards are improving and we've noticed a real step change over the last few years, countries like Taiwan countries like Malaysia, introducing mandatory disclosure requirements, but it is important to recognize that asset managers like ourselves who have invested in , in house research capabilities have created an informational advantage, but you know, data doesn't just lower ESG risk.
It provides more information to assess it, but it doesn't replace engagement. And I think we'd need to focus more on engagement as asset managers. And that's what we're trying to do with this fund because engagement really helps drive a deeper understanding of a company and can actually directly affect change of that.
Thanks. We spoke a bit about the challenges of spender risk, but as a final question, where do you see opportunities? Mostly,
I think there are opportunities right across emerging markets. There are over 20 countries in emerging markets and in 11 sectors as well. Our ratings tool looks to identify company specific ESG factors and then ranks them within their subset of industry. So for example, how an e-commerce company secures its client data or even the carbon footprint of an energy company. And I think the depth and quality of the erm , universe is improving rapidly and its focus on ESG is simply ideal.
And I think it's this change, which is ideal to drive longterm sustainable alpha. And we believe our strategies design, you know, the positive tills, the enhanced exclusions, as well as the focus on engagement, you know , it's clear in its objectives and it utilizes our strengths in these areas. Right .
Wonderful. Thank you so much Krisha for your time and for your insights. It was your first podcast . I think you've done. Amazing. Thank you very much for that. I would like to thank today's guest Chris , John Silva , client portfolio manager, Asian and emerging markets and Columbia Threadneedle. This podcast about emerging market equities was brought to you by Columbia Threadneedle. For more podcasts, please visit www dot funds event on an hour forward slash podcasts.
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