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Responsible Investment and Emerging Markets

October 2007. Responsible Investment and Emerging Markets. Dr. Danyelle Guyatt, Principal, London. Asset owners demand ESG integrated solutions. The Principles for Responsible Investment (PRI) were launched at the New York Stock Exchange in April 2006.

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Responsible Investment and Emerging Markets

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  1. October 2007 Responsible Investment and Emerging Markets Dr. Danyelle Guyatt, Principal, London

  2. Asset owners demand ESG integrated solutions • The Principles for Responsible Investment (PRI) were launched at the New York Stock Exchange in April 2006. • Aim: provide a framework for investors that believe that Environmental, Social and Governance (ESG) issues can impact financial performance and want to take steps to ensure these issues are integrated into the investment process. • As at 1 Oct 2007, PRI had 247 signatories representing over US$10 trillion AUM; 97 asset owners, 98 investment manager signatories and 52 professional service partners. • Significant source of demand to integrate ESG issues into investment decisions: • Investment opportunities; and • Management of portfolio risks.

  3. The link between ESG and emerging markets • Environmental issues: • Seeking and implementing sustainable solutions to fostering economic growth in developing countries will be a key driver for sustainable growth. From a portfolio management perspective, makes sense in terms of seeking opportunities and managing risks from poor environmental practices; • Social issues: • Human rights and labour standards are key issues to build into the appraisal of investment opportunities and possible risks (especially reputational and operation risks) in developing countries; • Governance issues: • Poor transparency aka high incidence of family-owned business make it imperative for fund managers to construct portfolios with exposure to companies with strong standards of governance and accountability. Less risk of a nasty surprise negatively impacting on portfolio performance.

  4. From ‘hot money’ to long term capital allocation • International investors often branded with the image of seeking ‘hot money’ in their allocations to emerging market regions in pursuit of growth. • Growth is part of the attraction of allocating to emerging markets – but at what cost to the local economies, and to portfolio risk-adjusted returns? • Long-term sustainable allocation to emerging markets through an ESG lens makes sense in terms of producing sound, well-managed portfolios that perform well over the long-term.

  5. Current and future demand from asset owners • Search for new EM equity managers that integrate ESG into their search for alpha and portfolio risk management • Review existing manager line-ups to assess their ESG capacity in the portfolio management process • Wider research project on EM equity manager’s capacity to integrate ESG • Global emerging market equity managers • Sustainability branded emerging market managers • Local emerging market managers in developing countries

  6. Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU

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