There is a perception that emerging markets companies lag their developed market peers in their Environmental, Social and Governance (ESG) quality. While this may be true in broad aggregate, there is considerable variation among individual companies. In the Jupiter Global Emerging Markets Focus team, we adopt a selective approach. High conviction, with a high active share, and concentrated (with typically only 30-40 holdings), we are proud to place ESG considerations at the forefront of our investment process, and believe we are fully able to do so in emerging markets.
ESG is deeply embedded in how we think about investment in emerging markets equities. It is not a screen but a key component of our fundamental analysis. We look for that rare breed of business in emerging markets that can continually compound returns year after year. We call these supercompounders. Using our three-pillar model, we look for companies that generate returns in excess of the cost of capital, with deep moats to protect those returns, and a long runway for future growth. Consideration of ESG factors forms a crucial part in determining how persistent these returns are. We want to ensure that a company’s economic advantage has not been built on sand at the expense of other stakeholders. Companies misguidedly seeking short-term profitability by mistreating the environment, labour or suppliers, will be unmasked eventually. Long-term corporate profitability requires strength in ESG. We want the supercompounders that we invest in to last for decades to come.
In our view, to be effective, ESG analysis must be undertaken in-house. Third-party data sources are notoriously unreliable, particularly in emerging markets. Blind reliance on this data is no recipe for success. Only through active engagement and involvement of portfolio managers can the nuances and materiality of the broad spectrum of ESG data points be fully appreciated, a distinct advantage of active management. While much of our ESG analysis is undertaken by the team, we also work closely with our colleagues in the Jupiter Stewardship and Data Science teams. This has enabled us to build a more detailed picture than would otherwise be possible, and to engage comprehensively with all companies in our portfolio on ESG issues as an integral part of the discussion around long term capital allocation and competitive advantages.
Measuring the path to net zero
The Jupiter Global Emerging Markets Focus strategy is aligned with the Net Zero 2050 goals. As such, it explicitly excludes investment in fossil fuel companies. These businesses fundamentally do not fit our investment process. Our search for high return on invested capital (ROIC) supercompounders guides us away from price-taking, commodity businesses and towards sectors displaying higher ROIC such as technology and consumer facing businesses. As these are also typically lower carbon impact sectors, it means that the strategy’s carbon emissions intensity is significantly lower than that of the emerging markets index. But this metric, important as it is, represents a snapshot at a given moment, not progress towards an ultimate destination.
When assessing companies on ESG issues, we apply well-defined metrics, so that we can track progress. With carbon intensity, we map each of our portfolio companies on the journey to achieving net zero carbon emissions. To ensure that our companies meet their Net Zero 2050 ambitions, a static analysis is insufficient: companies need to demonstrate ongoing progress on their journey to 2050.
The Paris Aligned Investment Initiative’s (PAII) Net Zero Investment Framework (NZIF) provides a useful framework to measure this progress. As an industry group, its mandate is to drive the attainment of global net zero greenhouse gas (GHG) emissions by 2050, as required by the Paris Accord. The NZIF framework sets out an alignment maturity scale that we use to understand where companies are on their journey to achieving net zero. The highest level, which we encourage all portfolio companies to attain in the future, is “Achieving net zero”. There are four other levels on the scale, and the framework provides detailed criteria that we use to determine at which level a company sits. The lowest level is “Not aligned” – companies that have not yet made a public commitment to achieving net zero emissions. We monitor companies’ progress through the scale and to encourage them to move along that path.
The pathway to achieving net zero…
Net Zero readiness maturity scale using the NZIF net zero alignment criteria
Currently, most of the Jupiter Global Emerging Markets Focus strategy portfolio companies are in the lowest category, “Not aligned”. In other words, they have yet to make a public commitment to achieving net zero carbon emissions by 2050. A cursory glance here though is potentially misleading, as the real world actions many of our portfolio companies are taking show substantial progress towards combating climate change. At a national level, while many emerging market countries have 2050 net zero targets, China and Indonesia have only 2060 targets, and India has a 2070 target. Companies in China, in particular, are currently reluctant to announce targets that are in advance of their government even though they have privately expressed to us that they believe it is possible.
Our analysis leads us to believe that this unsatisfactory situation will improve in the next few years. Although we do not expect the governments of China and India to bring forward their national net zero targets, we do expect more companies in emerging markets to do so, especially if they supply internationally. European and North American companies are increasingly required to report emissions from supply chains – which often include emerging markets. We believe pressure from international customers, consumers, and from the financial sector, will encourage more emerging markets companies to commit to 2050 targets. This is a unique challenge faced by emerging market investors, and one which we believe active engagement is ideally suited to support.
Using the industry recognised Net Zero Investment Framework, we expect that by 2025, most of our portfolio companies will have committed to achieving net zero emissions by 2050. Progressing further, by 2030, most of our portfolio companies will be disclosing not only Scope 1 (direct) and Scope 2 (indirect), but also the far more complex Scope 3 (supply chain and product use) emissions. We also expect that by 2030 some 18% (by assets under management) will be in the “Aligned” category. These are companies which will have credible decarbonisation strategies and capital investment alignment with their net zero emissions targets set.
Our commitment to reaching net zero by 2050…
Percentage of the Global Emerging Markets Focus Strategy holdings
Jupiter’s analysis using the NZIF is formally updated annually as part of the firm’s commitments as signatories to the Net Zero Asset Managers (NZAM) Initiative. As an investment team however, we continually look for progress across our investee companies. We engage with every company in the portfolio on the issue of net zero. Since March 2022, we have reassessed one of our portfolio holdings, Globant, a software company with offices in Argentina and worldwide as it will have achieved net zero emissions by 2030. Our continued, targeted engagement with our portfolio companies is mutually beneficial. We gain greater insight into the speed and progress of our portfolio’s achievement of net zero 2050, while our companies report that they benefit immensely from our guidance. Companies may simply not be disclosing the right data or have not appreciated the need to detail a pathway to net zero. We continue to monitor progress, leveraging our in-house resources, and supporting companies along the path to net zero emissions.
The NZIF has aided us in creating a clear and actionable plan to support our investee companies to achieve net zero 2050. But we recognise that ESG is a much broader than climate change. Biodiversity, for example, we believe will achieve the kind of momentum currently behind climate change. We are well placed to expand this differentiated approach more broadly across ESG issues as frameworks are developed in future.
FUND SPECIFIC RISKS
- Investment risk – there is no guarantee that the Fund will achieve its objective. A capital loss of some or all of the amount invested may occur.
- Company shares (i.e. equities) risk – the value of Company shares (i.e. equities) and similar investments may go down as well as up in response to the performance of individual companies and can be affected by daily stock market movements and general market conditions. Other influential factors include political, economic news, company earnings and significant corporate events.
- Stock Connect risk – Stock Connect is governed by regulations which are subject to change. Trading limitations and restrictions on foreign ownership may constrain the Fund’s ability to pursue its investment strategy.
- Emerging markets risk – less developed countries may face more political, economic or structural challenges than developed countries.
- Concentration risk (number of investments) – the Fund may at times hold a smaller number of investments, and therefore a fall in the value of a single investment may have a greater impact on the Fund’s value than if it held a larger number of investments.
- Smaller companies risk – smaller companies are subject to greater risk and reward potential. Investments may be volatile or difficult to buy or sell.
- Liquidity risk – some investments may become hard to value or sell at a desired time and price. In extreme circumstances this may affect the Fund’s ability to meet redemption requests upon demand.
- Currency risk – the Fund can be exposed to different currencies. The value of your shares may rise and fall as a result of exchange rate movements.
- Derivative risk – the Fund may use derivatives to generate returns as well as to reduce costs and/or the overall risk of the Fund. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Derivatives also involve counterparty risk where the institutions acting as counterparty to derivatives may not meet their contractual obligations.
- Capital erosion risk – the Fund takes its charges from the capital of the Fund. Investors should be aware that there is potential for capital erosion if insufficient capital growth is achieved by the Fund to cover the charges. Capital erosion may have the effect of reducing the level of income generated. For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.
The fund may be subject to various other risk factors, please refer to the latest sales prospectus for further information. The KIID and Prospectus are available from Jupiter on request. For a more detailed explanation of risks, please refer to the “Risk Factors” section of the prospectus.
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