We exclude fossil fuels, tobacco, and military spending from investment. Those are all ESG-sensitive sectors, and they fail to meet our financial criteria, especially fossil fuels. We are seeking to compound our investment over the long term, and the key metric we scrutinise is return on investment capital (ROIC), which measures the return a company makes on all its capital, including debt as well as equity. The problem we find with oil companies is that they are price-taking businesses: they are at the mercy of the market price of oil. The same applies to mining companies, which we do not explicitly exclude, but in which we are unlikely to invest – they are at the mercy of the price of cobalt, iron ore, or other minerals. Oil companies are highly profitable when the oil price is high but suffer losses when the oil price is low: they have no control over that cycle. Furthermore, most EM oil companies are majority-owned by governments. Engagement with the companies in our portfolio is essential to our process, and we doubt the feasibility of materially influencing the minds of large state-owned EM raw materials companies.
Finally, we believe emerging markets will greatly benefit from the growth in artificial intelligence (AI). They are vital to the infrastructure on which AI depends. Most of the world’s advanced AI computer chips come from Taiwan and Korea. The integration of digital with people’s lives in EM countries is impressive, and increasingly in advance of that in the West – app-based payment systems are an example. EM countries have often been able to leapfrog a technological generation, avoiding entirely the investment costs associated with legacy infrastructure.
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