Interview: RobecoSAM's Guido Giese

Interview: RobecoSAM's Guido Giese

Published: June 17, 2013

Companies in emerging markets are catching up with their developed-market peers in addressing sustainability.

It goes without saying that investors want to make money. That many want to back companies which treat people and the planet well is becoming clearer. That they can happily manage both at once is an idea that firms such as RobecoSAM, a Swiss investment boutique focused on sustainable investing, are keen to illustrate.

The research team at RobecoSAM has spent years examining the links between companies’ efforts at environmental, social and economic sustainability and the performance of their stocks. Each year the firm invites some 2,500 of the world’s biggest companies to take part in a screening process to judge their sustainability efforts. The results help to form the Dow Jones Sustainability Index, which ranks the companies according to their sustainability performance and financial success.

When EMEA Finance published its first Green Issue in 2010, the team had just updated a report arguing that investors were increasingly aware of the value of companies’ sustainability initiatives. According to the RobecoSAM team, the results “clearly indicate a positive relationship between sustainability and financial performance” as measured by stock returns.

Now the team is turning its attention to emerging markets, inviting a further 800 companies from 20 economies including Brazil, China, Egypt, Poland, Russia and South Africa to be assessed.

In this interview Guido Giese, head of indices at RobecoSAM, explains the trends his team has discovered when comparing the sustainability performance of companies in emerging and developed markets – as well as offering some thoughts on what next steps are needed for developing markets to capitalise on their achievements so far.

EMEA Finance: What particular social and environmental problems do emerging markets and the companies operating in them face?

Giese: Emerging markets are growing amazingly quickly, but this growth produces a lot of problems in many countries. Several counties that have grown very fast, such as China, have grown very famous for polluting their environment. Then there are problems around issues such as labour standards and social standards.

Ten or even five years ago, you could say that several of these countries, especially China, couldn’t care less about these topics. Ten years ago in many emerging market countries, it was a case of growth at all costs. That’s shifting at the moment. The attitude moves from a quantitative to a qualitative approach to growth, and so it’s no longer about growth at all costs, but how to take into account environmental, social and governance (ESG) standards.

We see that shift particularly at the political level. We’ve seen it in Brazil and in South Africa, where regulators have imposed more rules on companies as to what they have to report and which rules they must comply with. We even see it in China. In China’s latest five-year plan, which was issued in 2011, they implemented a huge package of new rules on how to reduce C02 emissions, the first time the country has done that. And China is a very strong central government – when the government has decided something, it pushes it through.

They’ve decided to spend US$20bn on research for electric vehicles and to subsidise the purchase of 4mn electric vehicles in the big cities to bring down the emissions of cars. That’s an enormous figure – more cars than we have on the roads here in Switzerland. That turnaround from the Chinese government came because they realised that growth at all costs doesn’t take the country where it wants to go.

We also see this at the corporate level. Chinese corporates, for example, are now catching up quickly in terms of reporting on sustainability and also in creating business ideas out of that.

Take the case of alternative energy. Five or 10 years ago the most famous companies in solar or wind energy were from places like Germany, Scandinavia or Holland. Now China is one of the driving forces in producing solar panels. That’s changed within a few years. China has realised that it’s not just in the interest of its people to help the climate, but also that they can create business from it. It’s not an obstacle, it’s an opportunity, and if you create the technology you can use to reduce pollution or create alternative energy, you can export these products. It’s a huge shift in the attitude of emerging-market countries.

EMEA Finance: In turn, how does this change the ways in which investors should be examining emerging-market companies? Is there a shift in how they should value potential investments?

Giese: In emerging markets the correlation between GDP growth and stock-market performance is much lower than in developed markets. In developed markets the link is very strong. In the US, the GDP growth rate and the S&P 500 index go hand-in-hand – when the economy is booming the stock market is rising, when the economy is in recession, it’s going down. It’s simple.

In emerging markets there’s not such a link. China had the highest growth rate in GDP terms in the past 10 years, but the stock market overall was quite disappointing. In other countries such as Mexico, it was the other way around – growth rates were not so great, but stock-market growth was.

In our research we found that in the past 10 years, one of the driving factors for corporate profits in emerging markets was how efficient companies are in using commodities. This turned out to be one of the key weaknesses of the Chinese economy – they used a huge amount of raw materials, but most companies were not resource efficient, and so when commodity prices were rising, that ate up corporate profits. That’s different to Taiwan or South Korea, where companies had already become more resource efficient and rising commodity prices didn’t hurt profits so much. It’s another reason that China is now investing so much money in alternative energy and resource efficiency – they realised it’s not only for the environment, but to be efficient and competitive.

The lesson is that it’s important for investors in emerging markets to look beyond GDP growth and towards efficiency in the usage of resources and commodities. It’s an area where Brazil has made more progress in the past 10 years than China, for example, and we see that in our corporate assessments. Brazil is quite advanced in its sustainability efforts and implementations, as is South Africa. Some companies are reaching levels that you only see in Europe.

EMEA Finance: So the gap between companies in developed and developing markets has shrunk?

Yes, and there are two drivers. In some regions it’s pressure from regulators and governments. But also, our assessment covers mainly the largest companies in the world – we invite the largest 2,500 companies in developed markets and the largest 800 in emerging markets to participate in our Corporate Sustainability Assessment. Most that we assess are international players being scrutinised by analysts around the world. For most such large companies it is simply not acceptable anymore to be poor in terms of sustainability. If you’re a well-grounded company you can’t afford to pollute the environment or to have a scandal in terms of how you treat your labour force. Your products are branded and consumers are no longer willing to accept bad corporate governance.

The full interview with Guido Giese will appear in the forthcoming edition of EMEA Finance. Click here to subscribe or register for a trial.