Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.” The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience. The goals of Five Questions about SRI are fourfold:
- To reflect on what SRI in emerging markets means to practitioners;
- To collect a catalogue of examples of SRI in practice in emerging markets;
- To raise awareness about SRI in emerging markets; and
- To enable SRI practitioners in emerging markets to network with peers around the world.
This week’s interview is with Søren Bertelsen, CFA, Chief Portfolio Manager, BI SICAV Global Emerging Markets Debt SRI, Denmark.
BankInvest (BI), founded in 1969, is an independent Danish asset manager, owned by 40 small- and medium-sized Danish banks. It was one of the first asset managers to invest in emerging markets corporate debt, in 2001. It is an affiliate member of Eurosif and a signatory to the Carbon Disclosure Project. BI SICAV Global Emerging Markets Debt SRI invests in corporate bonds in emerging markets. Its strategy is to create alpha by avoiding structurally weak countries and focus on companies with a strong strategic position, good corporate governance and strong cash flows. More than half of the portfolio is investment grade. Based in Singapore, Søren Bertelsen is responsible for corporate bonds in the emerging market fixed income portfolios. He heads a team of three who manages the fund. Søren Bertelsen joined BankInvest in 2000. Before joining BankInvest, he was a portfolio manager at Danske Capital responsible for equity investments in Latin America for eight years. He is a member of the education committee of the Danish Society of Financial Analysts. He is a CFA and holds a M.Sc. in Economics and Business Administration.
Emerging Markets ESG: How would you define socially responsible investment (SRI)?
Søren Bertelsen: I think the standard perception of SRI has to do with investing without compromising your conscience; without being in conflict with your moral or ethical obligations. However, I also think that SRI has a special role in credit analysis which is focused on identifying the risks of a loss. ESG factors are sometimes overestimated in the short run but underestimated in the long run. SRI is more focused on monitoring these risks and thus has a broader view of risks.
Emerging Markets ESG: What distinguishes SRI from mainstream investment?
Søren Bertelsen: In fixed income the potential return is known, so the focus is on avoiding the downside: ratings downgrades and defaults. SRI includes another set of information about the risks of the company which is often lacking in traditional financial research and analysis. We have found that ESG research sometimes highlights important issues that can have significant implications for the credit rating over time. In some cases, the information has also led to a sale from our non-SRI funds. In this way, mainstream investment is starting to include more ESG information in the analysis. Finally, I think that SRI often has a longer investment horizon than mainstream investment.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for emerging market companies to manage?
Søren Bertelsen: If the company has the will to perform well on ESG issues, corporate governance should be the easiest to manage – they just have to be honest and transparent. The social themes can be more difficult to manage as they change over time. As the surrounding society become more affluent and developed, the company will face increasing expectations of good social responsibility.
Emerging Markets ESG: Which extra-financial theme – environmental, social or governance – is the most challenging for investors in emerging markets to analyze?
Søren Bertelsen: Significant environmental and social issues are often well covered by local media and NGOs. Pollution and a high number of worker accidents is not the most difficult information to get and analyze.
Corporate governance can be very challenging to analyze, as there are many ways for management and controlling shareholders to extract value from a company and its investors. As a bondholder, we much prefer to invest in a company which has been listed on a stock exchange for several years, so we have an idea of the level of disclosure and the way it has treated minority shareholders in the past.
Emerging Markets ESG: Emerging markets SRI is a relatively new product that many view a niche, despite the growth rates and size of the BRIC economies as well as other emerging markets. Emerging markets corporate debt SRI is an even more specific product. Which are the crucial challenges and the major opportunities of SRI in emerging markets corporate debt?
Søren Bertelsen: Many SRI investors have historically avoided emerging markets because of the lower ESG standards and lack of reliable research. Now standards are improving and we have more research, but most investors’ interest is focused on equities. Fixed income is behind but catching up.
Most of the ESG research we receive from our research provider is bespoke; we are the first investor to ask for ESG research on the company. We are pushing the SRI boundary into emerging markets corporate debt. This is a challenge for the research provider, but an opportunity for us as we get information on risks that few analysts have covered before.
Eight years ago corporate in emerging markets issued US$20-30 billion per year, but now the number is around US$200 billion per year. There are now more corporate bonds than sovereign bonds in emerging markets (measured in both number and value) for the first time. Historically, returns in emerging markets corporate bonds have been higher than global corporate bonds – due to higher spreads and lower default rates – and this is attracting more investors. As emerging markets corporate bonds become mainstream, SRI investors will follow. This will lead to more ESG questions to bond issuing companies in emerging markets and hopefully lead to more sustainable companies over time.