A growing number of investors are looking to invest their money in a sustainable or responsible way. Many of these people could be forgiven for thinking that this would be difficult to achieve in emerging markets, where corporate governance is often perceived as poor and climate change is not top of the agenda.
Indeed, emerging markets tend to have more relaxed regulations and companies don’t have to report on so stringently on factors such as pollution and gender diversity as many developed market companies do.
But a number of emerging markets funds do have a remit to focus on environmental, social and governance (ESG) factors, and look to make investments in companies making a positive impact on the areas in which they operate.
Morningstar analyst Briegel Leitao believes these regions are packed with “untapped potential”. He says active fund managers can do the due diligence and research to unearth this hidden gems as well as engage with companies that need a bit more encouragement to prioritise ESG issues.
Here we look at three active funds with an ESG focus, which are rated by Morningstar analysts.
Impax Asian Environmental Markets
Investors might be familiar with Impax Environmental Markets, a fund which focuses on developed markets such as the UK, US and Netherlands, but this iteration looks across Asia for opportunities.
The fund, which has delivered annualised returns of 8.9% over five years, focuses on companies involved in energy, food and agriculture, waste and water.
While the fund does not have Morningstar Analyst Rating, Leitao has strong conviction in the trust's strategy. “It is not the typical asset management firm with lots of funds among which there are a few impact or sustainable options,” he says. “The managers are dedicated to these issues and all of Impax's strategies are sustainability-themed.”
He especially likes the fund’s impact reporting, whereby the managers annually release detailed data such as CO2 emissions avoided and total water treated. "Metrics such as these help investors gain insight into the real impact of the fund they are investing in”, says Leitao.
The fund currently invests in 43 companies and much of the portfolio is focused on energy efficiency, which explains its 25% weighting to tech companies. Largest holdings include East Japan Railway Company and Taiwan-based electronics manufacturer Delta Electronics.
Stewart Global Emerging Markets Leaders
The Silver-rated Stewart Global Emerging Markets Leaders fund has delivered annualised returns of 3.8% over five years. Unusually, for an emerging market fund, the portfolio is skewed away from China; instead its largest country weightings are to India (25% of assets), South Africa and Taiwan (9.6% and 8.7% of assets respectively).
The main themes you'll find in the portfolio are sustainable goods and services, which means companies creating positive outcomes for human health and hygiene, as well as responsible finance and required infrastructure, such as the provision of water and sanitation.
Morningstar analyst Andrew Daniels rates the fund as a solid choice, given its talented management team, best-in-class investment approach and competitive fees (its ongoing charge is 0.89%). While manager Ashish Swarup has only been at the helm since 2016, his focus on owning high-quality companies with durable franchises should make it less volatile than many of its peers, according to Daniels, who says the fund should bear up well in a downturn as a result.
The portfolio comprises 47 companies, and the team regularly meet the management of the firms they invest in and engage with them on various issues. Top holdings include South African company Discovery, which may be better known for its Vitality health insurance scheme, which encourages customers to have a healthier lifestyle through incentives such as cinema tickets and discounts.
BMO Responsible Global Emerging Markets Equity
BMO Responsible Global Emerging Equity is a favourite of Leitao's because of its focus on engagement - it produces an annual report on how it has engaged with companies and at shareholder meetings. Key areas of focus for fund manager Gokce Bulut include gender diversity and access to finance. According to the fund's 2019 engagement report, across the portfolio's investments women make up an average of 20% of board positions, while companies the fund invests in helped more than 70 million people access finance programmes.
The fund focuses on six themes: responsible finance, food and nutrition, health and wellbeing, sustainable infrastructure and energy transition. While that opens up a wide universe of potential investments, just 42 stocks make it into the portfolio. Top holdings include toothpaste maker Colgate-Palmolive and Indonesian bank PT Bank Mandiri.
Launched in 2016, a strong track record of performance - it has delivered annualised returns of 10.4% over three years - earns the fund a five-star Morningstar rating.
