Emerging markets such as Brazil, Taiwan, and India are benefiting from a number of tailwinds as these countries each forge their own path and focus on economic growth. India, for example, has benefited significantly from liberalisation of the economy in 1991 and is predicted to grow its annual GDP by a rate of 6 per cent over the next five years.
With emerging economies, like India, often melting pots for innovation and opportunity, we have seen notable opportunities for sustainable investors. As more invest, many are focusing on filtering out companies that do not meet a high threshold of environmental, social, and governance standards.
These investors have good intentions; however, this focus on metrics and quantitative analysis, we believe, can lead to unintended consequences for those who rely too much on data to find quality stewards. This process can allow companies that do not contribute to sustainable development to meet the requirements to enter a sustainability index based on a few scores.
For example, we have seen instances of businesses manufacturing sugary drinks and tobacco making their way into sustainability-labelled funds despite the questionable contributions they make to society. In our view, that is why blending qualitative and quantitative analysis incorporating factors that include people and historic performance is vital when stock-picking in these markets.
Searching for stewards
For sustainable investors, aligning investments with the UN’s Sustainable Development Goals (SDG) is key to driving socioeconomic impact in emerging markets. These goals incorporate a wide range of targets, from eradicating poverty and hunger to promoting quality of education. We believe that investing in companies that actively contribute towards these goals drives social and environmental impact and returns over the long-term.
From our experience, core to this approach is good governance and finding strong leadership teams who are competent stewards. This is particularly important in EM, with firms often under the control of a family or government entity. Yet, to find these firms, you need to go beyond data alone to find stewards that are profitable and actively integrate SDGs into their business models.
A prime example is Raia Drogasil, Brazil’s leading drug retail chain, which is stewarded by three families: the Galvao, Pippinzi, and Pires Oliveira Dias. Their effective governance and commitment to the company’s ethos are indicative of the high standards we seek in sustainable investments. The leadership of Raia Drogasil have proven their ability to find the sweet spot between growth, environmental, social and governance (ESG) factors, and profitability. Over the last few years, competitors with a lack of experience but hungry for profits entered the market and quickly opened stores across Brazil. Despite this aggressive competition, Raia Drogasil stuck to their tried-and-tested business model as opposed to undertaking a risky strategy to match their competitors.
We believe meeting management teams and understanding how they perceive and react to challenges and find solutions to today’s global issues is key to finding resilient firms. Data alone cannot tell you this. However, by taking a bottom-up approach, investors can identify and invest in high-quality companies led by resilience stewards that further sustainable development and do not compromise on returns.
Riding the wave of EM
Despite the challenges facing emerging markets in the last decade, certain companies have demonstrated resilience and growth through strong stewardship. These firms have been able to ride out volatile periods and maintain strong trajectories in spite of the uncertainty they face in their country’s macro-economic environment.
Raia Drogasil, for instance, has increased its market share significantly, from 9 per cent to 15 per cent over the past 10 years. The firm supports good health and well-being of Brazilians by ensuring they have access to affordable medicines, providing employment to over 50,000 people, where over 60 per cent are women, as reported in Raia Drogasil’s 2022 Annual Sustainability report.
With the firm tracing its roots back to the first half of the 20th century, its leaders have navigated coups, high inflation, and instability while not comprising their focus on sustainability and good shareholder returns. We have seen first-hand how having a patient steward at the helm of the firm, who has an eye on running the business for the next generation, is a tangible advantage.
Ultimately, no single metric will enable you to find out whether firms such as Raia Drogasil are led by good leaders and stewards. You need to go beyond the data and look to how companies have dealt with periods of instability, created resilient businesses, and how they are now advancing sustainable development. This approach enables investors to truly find sustainable companies in emerging markets that are primed to deliver sustainable returns over the long term.
Forming a nuanced understanding of a company’s quality beyond surface-level metrics is only possible through truly understanding the stewards at the wheel of the business and what they are achieving on the ground. We believe this is vital to finding EM firms with strong sustainable business model that can unlock a host of benefits for their areas of operation and shareholders.
Jack Nelson, portfolio manager, Stewart Investors
