In a world of anticipated resource scarcity and rapid population growth in which it believes sustainable companies will deliver greater value, First State Investments is preparing to launch a emerging markets sustainability fund into the Australian institutional market.
More companies in the emerging world would be pressured to implement sustainable business models as their economies march into an era of resource shortages, burgeoning population growth and global warming, according to David Gait, senior portfolio manager with First State. “Emerging markets are realising that they have to do things differently. A decade ago, their idea was to get rich first and then get green. The US, UK and Australia have done this, but now it seems that the emerging markets might not be able to,” Gait said.
Up to 75 per cent of the new product, slated for a prospective launch in November, would be comprised of holdings in the existing Asia ex-Japan sustainability fund, which is near capacity. Gait argued that global warming was primarily an emerging markets concern as agricultural production in these economies would be most threatened and the risks of natural disaster more acute than in the developed world if climate change occurred. This scenario would be exacerbated by the projected increases in the populations of emerging economies, which would demand more food from an increasingly urbanised and polluted landscape.
Companies operating in a sustainable way would be the most profitable, Gait said. But many companies in emerging markets were still guilty of causing environmental and social degradation, and putting shareholder capital at risk, in the course of business. On top of this list were resource companies. Gait said there were rarely any shades of grey in First State’s appraisals of these businesses: the good were very good, and the bad were terrible. Since many of the companies were owned or controlled by governments, “there is a question mark about whether the companies are run in the interests of minority shareholders,” Gait said.
The manager is further reluctant to invest in resources companies as a rule since the value of these stocks can be heavily influenced by the market price of the commodities they produce, irrespective of the quality of management. “Cheaper prices are outside management’s control.” First State engages companies that are committing, in its view, infringements of environmental, social and governance standards conveyed by the United Nations Principles of Responsible Investment, to which it is a signatory. It is in the process of redeeming an investment in its Asia-Pacific fund with an energy company in the Philippines that has caused environmental damage.