21 Oct 2019
Traditionally, investing in companies operating in, or with some exposure to, emerging markets as often offered investors attractive returns – and an allocation to emerging markets adds useful equity diversification in a portfolio. However, these companies may not necessarily have been doing any good for the developing countries themselves.
We believe that it’s possible to find profitable companies that are not only good for your portfolio but are well positioned to help a country develop sustainably and improve the lives of local populations. These companies face fewer risks and are better placed to deliver long-term growth.
We call this ‘impact investing’.
We see three particular areas as making a measurable difference:
1. Sustainable goods and services (e.g. affordable healthcare)
2. Responsible finance (e.g. banking services for the poor)
3. Infrastructure (e.g. water and waste management).
These three areas are all vital for supporting the development of the countries in which they operate.
Companies that ‘do good’ by helping people
Sustainable goods and services can take many forms. They could be food, drinks and other consumer staples that help combat malnutrition. Affordable medicines and lifesaving treatments. Products or services that help factories become safer workplaces.
Our chosen companies might make healthier food that reduces the risk of diabetes. They might make vaccines. What they all have in common is a product line that either directly or indirectly helps people.
For ‘first world’ residents like us, keeping money in a bank or investment account is convenient and facilitates daily life essentials. But there are billions of ‘unbanked’ people globally, paying for rent and goods in cash, and without access to other financial products such as insurance, investments, or pensions. While 100% of Norwegians have access to a bank account, this figure is less than 10% in Pakistan.
Financial services firms are now seeing the advantages of social inclusion and extending their services to more disadvantaged people, helping to pull them out of poverty through participation in the capitalist economy.
Infrastructure is essential for a country to function properly. Think about companies that provide water, energy, transport or housing. But could they provide any of these more sustainably? Lower carbon technology, energy efficiency, recycling, cleaner water and sanitation all help a country function with a smaller ecological footprint.
What type of companies that ‘do good’ are also likely to be good long-term investments?
There is no point in investing in a company that makes a positive impact in developing countries if that company is not going to be around in a few years. It’s important to seek companies that have a sustainable business model.
Investors need to make sure the company is well managed and remunerated for long-term behaviour rather than short-term speculation. Assessing management under the lens of how well employees are looked after, checking their staff turnover and safety records is key, alongside factors such as brand and market share. Does the company have pricing power and a competitive advantage?
Companies making products that are actually needed by emerging market societies are more likely to deliver less volatile performance and face fewer risks to their licence to operate over time. For example, consider the difference between a consumer company that derives the bulk of its sales from food containing high levels of sugar, salt and fat, and one that sells healthy foods. Look at the long-term attractiveness of the companies. Which company is more likely to face political and regulatory pressure?
Consider the company’s long-term performance and resilience in challenging economic environments – its capability of growing cash flows over the long term as it contributes to and benefits from a shift to a more sustainable development model.
Businesses can help themselves and others
There are numerous examples of companies that are good for investors and are managing to do good in emerging markets. Unilever’s Shaktayama programme is a well-known example. Thousands of female entrepreneurs were hired as door-to-door distributors, providing them with employment while extending the reach of Unilever’s products in rural areas.
Less well known, but no less impactful, are companies like Novoenzymes, which fortifies food with vitamins and minerals to combat nutritional deficiency; or HDFC Bank, which offers mobile banking and affordable insurance policies. In each case, a small innovation improves the lives of the poor. At the same time, company cash flows are boosted and their brand strengthened. Adopting an approach for inclusion is a long-term business strategy, rather than a short-term ‘corporate outreach’ or ‘social responsibility’.
What might benefit investment portfolios?
When looking for long-term investments in emerging markets, consider funds that continue to engage with companies who take a long-term view, keep a sense of purpose, and ensure investor protection is part of their business model. This should benefit those developing societies, corporates and investors in the long run.
Patrick Thomas, Head of ESG Investments, Canaccord Genuity Wealth Management.