According to First State, sustainable investment has always been an integral part of the philosophy and stockpicking process of its Asia Pacific and emerging markets team. However, focusing on environmental, social and governance aspects has not meant compromising returns.
The First State Asia Pacific Sustainability fund, for example, has outperformed its peer group. According to Trustnet, the fund gained 18.4% over the past three years, compared with a 6% gain for the Asia Pacific excluding Japan sector. Meanwhile, over the past year it lost 15.3%, compared with an average sector fall of 19.5%.
First State has appointed David Gait as senior fund manager for its newly launched Global Emerging Markets Sustainability fund after he successfully co-managed the Asia Pacific Sustainability fund with Angus Tulloch.
Gait, who joined First State in 1997, says he will apply the same strategy to other emerging market asset classes. “We have got a team of 19 analysts and will meet about 2,000 companies every year in order to identify the 50 or 60 best companies with the strongest sustainability [mandate],” he says.
The newly launched fund, which is benchmarked against the MSCI Emerging Markets Free index, aims to capitalise on the growth in sustainable business practices in emerging markets.
It offers investors a disciplined approach to sustainable investment in emerging markets by targeting “sustainable leaders”. First State says it will focus on companies whose business models are positioned to benefit directly from opportunities in renewable and cleaner energy, energy efficiency, water management, waste and pollution management, environmentally aware consumer products and services, and broad sustainable development.
In terms of geographic asset allocation, 55% of the fund is invested in Asia, 23% in Latin America, and 20% in emerging Europe, the Middle East and Africa (EMEA). “Asia is an emerging market that faces some of the biggest sustainability challenges,” says Gait.
Asset allocation and idea generation starts with “a blank sheet of paper”. When building a portfolio, he does not focus on countries but applies environmental, social and governance criteria to each investment in a bottom-up approach.
Positive engagement is also part of the investment strategy: it is not all about “buying and selling pieces of paper and electronic tickers.” Gait adds, “We do a lot of positive engagement in the companies we invest in. Recently, we engaged in labour concerns, environmental issues and land resettlement issues.”
The fund will not employ formal negative screening, says First State. But it is unlikely to invest in companies in “high risk sectors” such as armaments or tobacco because of the environmental, social and governance risks.
He warns that emerging markets cannot “develop the same carbon intensive economies because we live already up to the planet’s limits”.
By 2050, Gait says the population is expected to rise by 2.5 billion people and 98% of this increase is going to be in emerging markets. “Emerging markets have to have sustainability,” he says. “If everybody in Brazil and China lived the same lifestyle we do, we would need three planets. And if car penetration rises in India as much as in the USA, it is very hard to see where all the steel should come from.
“Emerging markets have to have sustainability. If everybody in Brazil and China lived the same lifestyle we do, we would need three planets.” He stresses, “Now is the right time to invest in these things.”
He says there are no oil companies in the portfolio but some natural gas companies. “Gas is going to play an important step towards cleaner energy and is much more cleaner than oil and coal.”
Gait heads new First State fund