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| Low altitude sky view of Cape Town harbour and city centre toward Table Mountain, 9 July 2013. PHOTOCREDIT: Jean Tresfon, by permission. http://www.flickr.com/photos/jtresfon/ |
EMERGING RULES OF INVESTMENT
The rules of investment are different in frontier and emerging markets. Even before the start of the 100th edition of the Tour de France 13 stages ago, I had taken to explaining the gaps between regulations and realities in investment by using the example of cyclist Lance Armstrong (first "I never tested positive" for a decade, then that tear-jerker Oprah Winfrey half-apology apology). Investment, and investment analysis, in frontier and emerging markets happens across borders of regulations, guidelines and laws. The SinCo Investment Philosophy is that there is ESG in every investment decision in the global professional investment management industry, sized at $62 trillion by BCG. Sustainable investment is proactive approach to advanced investment management through integrating ESG factors. It is a broad term, and details matter. None more so than when investing in frontier and emerging markets, the subject of Thursday's global webinar hosted by MSCI ESG "ESG Investment Implications for Emerging Markets". My view remains that "emerging markets" tag is a sweeping simplification, useful in the 1980s when coined by the IFC, redundant in this decade. China has an orbital manned space program, India launched a missile from a submarine platform. Emerging?! We have a competitive economic marketplace in which "[c]hanging trade patterns show, the BRICs and the N11 becoming bigger should make us all wealthier in aggregate...the view of the BRIC countries becoming bigger than the US before 2015, and bigger than the G7 by 2035..." according to Jim O'Neill in his last note "The World Still Needs Better Economic BRICs" in April 2013.
A. Beyond BRICS countries, towards frontier markets and frontiers of ESG:
- Defining your universe of opportunity, and your portfolio entry points.
- Understanding the license to operate of professional investors and their portfolio companies.
- The scope of rules and regulations is smaller than global reputations.
- Relationships are critical in markets with more forms of alternative ownership models and new offerings.
- PRIiP2013 has an important footprint effect for PRI, leveraging strategic opportunity in Africa.
- Introduces opportunities in fragments, the frustrating search for scale.
- The asset allocation decision and sector exposure may be more important than the geographic universe opportunity in Africa.
- Will the PRI legacy be more than FIFA FWC 2010?
ESG may act as a proxy for advanced due diligence or a marker for absent rules in the marketplace. Food and beverage products with a good reputation are critical to food and beverages companies, as well as their investors, regulators, consumers, and politicians. Food is politics, never more so than when analysis by FAO and OECD predicts that cheap food is history. The Access to Nutrition Index project has illustrated to me that making ESG happen in growth markets will reveal limits to ESG data coverage, national differences in reporting, culture differences, language and jargon barriers, and opportunities to re-interpret ESG concepts.
Africa introduces opportunities in fragments, and may frustrate businesses and investors seeking for returns to scale, because the continent is so diverse, and so large. For investors seeking exposure to the Africa growth story (not the McKinsey-esque hype, the other story based in reality), I suggest exploring the asset allocation decision and sector exposure. Choosing the right sectors, and which asset classes to invest through may be more important than the geographic universe opportunity to be had in covering Africa. At SinCo we encourage thinking that mirrors the business being done in emerging markets, following anchor industries with multi-stakholder high-impact, high-visibility sustainability profiles, for example, investing in frontier markets in the mining sector faces issues of resource scarcity, above-ground risks, lesser regulated jurisdictions, community pushback, transparency, the "Bumi syndrome" where historical, relational business collides with expectations of corporate governance. So investing in this theme will track a material economic and sustainability trend. The Africa growth story is overplayed. This is demonstrated plainly by the latest UNCTAD report describing intra-Africa trade barriers, often experienced by overland travelers and trucks by hours-long border crossings.
And so the annual event machine that is the PRI in Person event is cranking up for the conference 1-2 October being hosted in Africa for the first time. Like the FIFA Football World Cup 2010, it will be in Africa's largest economy, South Africa. Africa has been represented in the Principles for Responsible Investment (PRI) from the start by Africa's largest sovereign wealth pension fund, the US$131 billion AuM Government Employees Pension Fund of South Africa. The PRI South Africa network was one of the first country networks, illustrating the take up by investment managers and services providers, asset owners have been largely absent. John Oliphant, Head: Investments & Actuarial, has lobbied hard to get the annual show onto the continent. I was at a particularly frank meeting of stakeholders in 2010 when investment professional colleagues were left staring at their notepads as questions about making responsible investment happen in Africa were hanging in the air over the boardroom table at GEPF headquarters in Tshwane.
Based on the largest street protests in a generation in fellow BRICS major Brazil, it looks like the role of construction companies, and their billion dollar contracts, will also play out. I am looking forward to the FIFA FWC2014 in Brazil (especially following THAT 3-0 hammering of Spain last week), and the Rio Olympics 2016. In the withering glare of the business media this week has been billionaire Cesar Mata Pires (Bloomberg: "World Cup Billionaire Stirs Brazil Protests Over Stadiums"). The 90% shareholder of construction firm OAS has benefited hugely from infrastructure projects, and has leveraged financing from Brazil's BNDES development financing bank. OAS has low income housing deals with Brazil's 3 largest pension funds which have an asset base 2x Luxembourg's GDP in 2012. BNDES saw its loans double since 2008 to 156 billion reais last year, twice the total lending of the World Bank. PRI Board member, PREVI, is the largest in Brazil, and is based in Rio de Janeiro. Apparently, a street protester's placard allegedly included "The $ for Education Went to OAS". Ouch! No doubt @BW journalist @BlakeSchmidt is off Mr Pires's scoop shortlist... Bloomberg reports that with the help of subsidized loans from Brazil’s state development bank, closely held OAS SA had revenue of $3.4 billion last year. The OAS head of investor relations Barreto described protesters’ "targeting of OAS is “ignorant” and “simplistic,” and that the company obeys the law...It’s the only existing business model in Brazil." In future posts I will offer some comments on alternative ownership structures and the role of the national governments in frontier markets in financing growth.
And finally, a quick update on the marathon project to roll out the AfricaSIF.org 2012 Trends Report (http://www.africasif.org/trends-2012.php). Along with the all-volunteer team of practitioners and graduate students across Africa, I have been working on nailing down the data, analysis and commentary for this first-ever report. The excitement in the report is this new analysis from Africa for Africa and the world. The team is now targeting the IMN Africa Cup of Investment Management 27-29 August for the start of the launch roadshow. This first-ever reporting of professionally managed assets investing in Africa with ESG in some way included in the process. Collaborative project includes GEPF, MSCI, Bloomberg, Investec Asset Management, SinCo, RisCura, Mergence Investment Managers, OMIGSA, and Frost and Sullivan. The survey estimates that the level of sustainable investment in Africa is high with about $233 billion AuM or 63.4% of total AuM of Africa investments is self-reported to be managed according to sustainable investment principles. This implies the African (competitive) market is material for sustainable investment firms, but also pretty scrappy to command market share. Research is costly, especially north of South Africa where reporting is thinner. This helps explain why all major ESG research shops now have decent large firm coverage in South Africa, and why MSCI ESG just hired their first Africa-based analyst starting end August 2013 in Cape Town. Good timing. Chris Froome, current race leader and likely the first Africa-born winner of Le Tour, may be lying on his couch wearing a yellow jersey by the end of July.
@esgarchitect
SinCo - Sustainable Investment Consulting
www.sincosinco.com
@SinCoESG
UPDATED 15 July 2013: Text edits, paragraphing, hyperlinks.
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