Invest for Good: ESG investing in the context of emerging markets – Mobius Capital Partners

By Nedgroup Investments


Dr Mark Mobius, the Founding Partner of Mobius Capital Partners, discusses the merits of ESG investing in the context of emerging markets.

To listen to this conversation, go to Nedgroup Investments Insights on Apple Podcast, Google Podcast and Spotify. Click here to watch the recording of the conversation.

Mobius Capital Partners was founded in 2018 and has a very unique strategy of investing in emerging markets (EM) around the world with improving sustainability at the heart of their investment process.

Why did you identify this specific investment strategy, how do you bring it to the fore and what does sustainable investing mean to your team?
Sustainability is something we’ve been looking at since we launched the first EM fund in the US in 1987. It’s interesting that in recent years ESG has become popular. In our history of investing in EM, we always paid attention to these factors to control risk, but didn’t label them as ESG. If you look at the investments we’ve made you’ll see that in many cases we were caught out when something happened to the environment as a result of actions from the company in which we were invested, e.g. mining companies. We were also affected by social changes, such as strikes or layoffs, which created social problems and resulted in a bad reputation for the company. We therefore started an independent firm to focus on engagement with companies in order to help them improve their ESG factors.

The most important of the ESG factors is governance. When we invest in a company, we get commitments from management that they are willing to engage with us in a friendly manner to improve governance. This includes an independent board of directors, good communication with shareholders, etc. We can then impact the social, economic and environmental aspects. We are very engaged with each company and only invest in about 30 businesses. We hold them for the long term and have seen incredible benefits as a result of our engagement. Share prices have gone up partly as a result of the engagements and companies have made improvements in terms of governance and their behaviour in the environmental and social spheres. Sustainable investments are those that benefit society and shareholders. If you improve ESG, share prices will improve, so it’s a win-win situation, which is becoming more prevalent as investors demand good ESG participation and performance.

There is evidence that companies who pay attention to ESG factors provide better outcomes for investors. Is it always possible to achieve both of these at the same time and in which areas do these two goals collide most prominently?
Mores and more studies show that companies with high ESG scores do better in terms of price performance. More and more fund managers are recognising this fact and are making ESG a key investment factor. We’ve also added corporate culture as another factor, which has been overlooked. While culture can be subjective to measure, it’s important when evaluating companies.

If active investors are more engaged with corporate management, do they have an advantage over passive investors when it comes to assessing culture as an example?
Yes! If you’re engaging, you’re communicating with the company on a continual basis. We speak to our companies monthly about how they can improve their governance. We get an incredible reception from them. They are keen to improve their ESG as a result of pressure from their stakeholders to improve. Culture cuts across all of these areas. We engage in a friendly way and if the company is not interested then we won’t invest. We are very selective in the way we look at these companies.

Case study: Turkish Airlines
We were invested in Turkish Airlines and during a conversation with the MD indicated that they had no independent board directors. He asked us to engage with their largest shareholder, the Turkish government we spoke to the a member of the Treasury, who suggested there should be two independent directors on the board, they had just not been asked previously. So we got a very capable businessman on the board, which resulted in a big improvement in the way it was run. Turkish Airlines is one of the best airlines in the world today. We also introduced them to a caterer from Austria who happened to be a Turkish national who now supplies the airline - their food is outstanding. This is a good example of a friendly engagement having a big impact.

How do you deal with companies whose management are not receptive to your ESG requirements?
We were invested in a company in Brazil where we noticed that the board of directors were all family related. We suggested they appoint some independent directors. He gave lip service to the idea with no action. His family members were unwilling to leave and he was not able to force them so we decided to sell our investment in the company. Sometimes you can’t be successful.

How do you deal with companies where corruption is part of their broader community culture?
We were on our way to visit an oil company in Lagos, Nigeria and were behind one of their oil tankers. We noticed the tanker stop and allow some children to fill their buckets with oil. When we raised this with the company, they said that was part of doing business in the area and prevented their trucks being vandalised. This is where culture plays a role with the company having to accede to the local corrupt culture and shareholders need to understand this.

How does corruption influence the way you invest?
In many EM there are corrupt governments and the question we ask companies in which we invest is how they handle the government and work with corruption in their society. Most of these companies don’t accede to the corruption. They’re willing and able to stay away from areas of corrupt practices by adhering to a very high standard and are not willing to give in even if it means losing business. The US Foreign Corrupt Practices Act has gone a long way to help the situation. If a company, regardless of where they are in the world, is involved in corruption they can be charged under the Act if they do any business in the US. It’s also made a lot of companies stronger in their fight against corruption and their unwillingness to accede to it.

How has being a director of some of the companies you invest in helped you to focus on the ESG factors?
Being on the board gives you a lot more insight to what’s going on in the company and the opportunity to stand up for what is wrong. Because a company wanted me on the board as an independent director, they tended to be more cautious in the way they behaved and wanted to do the right thing.

Does your focus on improving sustainability lead to any sector or regional bias in the portfolio and if so, is this a permanent or transient feature?
It does have some impact. We stay away from sin stocks, such as cigarettes and gaming and also resource companies and mines because of the risks involved. We won’t stay away permanently, but will watch carefully what they’re doing regarding the environment and will be cautious. We do, however, have a diversified portfolio. We’re big on technology, consumer products and industrial products and medical is also big for us. There is some bias but it’s not complete.

Is the portfolio concentrated because only a small number of companies meet the attributes you look for?
We don’t only look at ESG, but also at the company’s profitability, return on capital and dividends, which all have to be in place before we invest. Another reason for the concentration is that it allows us to spend more time with each company, engaging and helping them to improve. We’ve found that a concentrated portfolio tends to provide better results.

A couple of your stocks were introduced to the S&P Sustainability Index. What does that mean for the companies, you and the impact on cost of capital?
It means a lot to us in that some of our work is having an impact, which is important. By being in the indices, companies are noticed and shareholders who want to invest in companies with high ESG standards will invest and stock prices go up, so it’s a win-win situation.

You recently released your new book, ‘The inflation myth and the wonderful world of deflation’. What can we expect in the book?
In the book I outline how inflation statistics are flawed and not a good measure of what is happening in the real world. The basket they use to measure inflation changes from month to month and year to year. This is a real issue as central banks depend on these inflation statistics. Prices do go up, but that’s a reflection of the devaluation of currencies. The prices of goods and services are actually going down thanks to technology. Fifteen years ago telephone calls were far more expensive than they are today.

In many countries, even if you used the flawed inflation statistics and looked at average wages, you’d find that wages in these countries have gone up faster than the so-called inflation. Deflation is good for lower income earners and technology is causing more and more deflation.