by Palle Ellemann, Lead Emerging Market Engagement at GES
* See the previous post for part one of the article.
GES has been running the Emerging Markets Engagement (EME) programme since 2010 and due to the scope and working process, it fits perfectly with the expectations of due diligence and proactive risk mitigation in the OECD Guidelines for Institutional Investors. The EME programme was started together with investor clients having the same thoughts as the OECD Guidelines now reflect: Looking at the entire portfolio, how do we address the most material ESG risks? In terms of making priorities and applying a focus on the highest risks, it is logical to focus on the emerging markets, because investing in companies on these markets – in general – involve higher ESG risks compared to developed markets. In the emerging markets, you will often find weaker governance structures with wide-spread corruption, lack of regulation related to the environment, human rights and labour issues, and poor or inconsistent enforcement of the regulation. Additionally, the companies have often less awareness and underdeveloped practices of risk mitigation when it comes to ESG and the disclosure is – in general – far from the standards in more developed markets. So, it makes sense from a risk-based approach to focus on emerging markets.
In the EME program, we use the client portfolios to select companies for engagement. We consider the size of holdings and ESG risks related to each company given the industry and locations of operations. GES has over the years built a strong understanding of ESG risks, not least due to more than 10 years of Global Ethical Standard screening. When we have identified the high-risk companies, we will approach these companies and in most cases, request a face-to-face meeting to discuss ESG risk mitigation. In 2016, GES conducted 88 face-to-face meetings in 11 different emerging markets. The face-to-face meetings are essential to build a true understanding of the company and its context and to build trust in the relationship that will allow us to affect change in the engagement process. Before each meeting, we make a full review of available ESG disclosure to address the most material ESG risks that are not yet mitigated in a satisfactory way. We define clear objectives with the engagement and follow up on a regular basis with conference calls or face-to-face meetings.
Clients can follow the engagement dialogue and progress in the GES Client Forum and receive half-year reports flagging the positive engagement results as well as the challenging companies, where we may be concerned with lack of response to the engagement or particular circumstances for the ESG risks that they face. There are many examples of positive engagement results driven by the proactive outreach to the companies and in several occasions, GES has been instrumental in companies committing to and producing the first ESG disclosure, such as a Sustainability Report.
The strong focus on face-to-face engagement with the companies gives GES and investor clients a unique insight to ESG risks and the factors that drive or hamper change in each company. This makes us well-positioned to influence for change and thereby mitigate potential adverse impacts on behalf of the investor clients.