Managing Through Shades of Gray: Stewardship and Impact in EM Equities

© Charl Folscher

The world is complex, and for active investors, the “right” thing to do is not always defined in black and white, according to Franklin Templeton Emerging Markets Equity’s Andrew Ness. Here, he shares why he believes sustainable investing is managed through shades of gray, explains what sustainable opportunities he’s seen in emerging market economies and what it means to be a good steward of capital.

Emerging markets present a unique set of challenges for sustainable investing. Cultural contexts vary, as do their stages of development from an environmental, social and governance (ESG) perspective. This reality can pose dilemmas for investors seeking positive multi-stakeholder outcomes—for instance, where societal and environmental trade-offs exist. The world is complex, and for active investors, the “right” thing to do is not always defined in black and white. Instead, we believe sustainable investing is managed through shades of gray.

Core Stock Drivers: Structural, Sustainable and Stewardship

The core stock drivers for investors can be summed up in the 3S’s: Structural, Sustainable and Stewardship. Structural opportunities, sustainable earnings and responsible stewardship are therefore the foundations of an effective, long-term approach to emerging market investing.

  • The long-term structural opportunity in emerging markets—demographics, technology, and consumption—which provides the beta for investors.
  • Actively identifying and targeting companies with sustainable earnings power that markets are mispricing can provide alpha for investors.
  • And finally, the responsible stewardship of clients’ capital and the leveraging of company relationships to create value through constructive engagement provides the delta for investors. Focusing on stewardship, what does it mean, how does it drive day-to-day investment activity and what are some of the challenges in trying to implement it consistently?

The UK Financial Reporting Council’s Stewardship Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.” The code also states that “asset managers cannot delegate their responsibility and are accountable for effective stewardship. Stewardship activities include investment decision-making, monitoring assets and service providers, engaging with issuers and holding them to account on material issues, collaborating with others, and exercising rights and responsibilities.”1

It is important to note that the code requires tangible demonstration of these actions, rather than just a statement of compliance.

One of our core beliefs is that we are responsible stewards of our clients’ capital, so how do we define it? Our definition of stewardship is straightforward. Clients entrust us with their assets, and it is our responsibility and goal that when we eventually return those assets, they are in better condition than when we received them.

Our stewardship approach impacts how we act as investors—integration of ESG and active engagement with management; how we treat our clients by putting them first and being responsible fiduciaries; and how we behave as a business by being a responsible global citizen.

I was mentored by a very traditional investor in Glasgow who regularly reminded me about the purpose of asset management—which is not just about beating an index—it is a stewardship role that includes providing long-term capital while acting as a co-owner in a business to protect a client’s interests. That purpose has now expanded to one where we have broader societal responsibilities.

Essentially, we are looking to ensure that the growth of our portfolio holdings is done in a sustainable manner and that it does not compromise other stakeholder interests. We do that by leveraging our deep relationships and cross-border expertise to create value through constructive engagement.


In the corporate world, there are multiple shades of gray from very dark to quite light. Some examples:

Video games—some experts suggest these encourage violence in kids with negative health impact of an increasingly sedentary lifestyle. Or are they a medium for social interaction that has preserved the mental health of a generation of teenagers during lockdown?

Social media—a poisonous environment of angry, tribal views while compromising our personal data privacy? Or platforms that connect people in a way that was previously impossible whilst enabling millions of small businesses to thrive and engage with end customers?

Green energy—the solution to our climate fears? But, are we prepared to cede our land to solar and wind farms, can we recycle solar panels and batteries or just dump them, and do we care where rare earth minerals come from or how they are mined?

And finally, e-commerce as probably one of the more controversial sectors—enabling the sale of lots of affordable goods, which is great for customers. However, ecommerce is also ripping up and disrupting the business models of many small- and medium-sized businesses that get in the way.

As you can see, there are many shades of gray. Nothing is clear cut.

Path to Sustainability

From an investment industry perspective, we have seen an early focus on sustainable investment in emerging markets evolve to move away from a risk-assessment focus toward ESG and sustainability—where investors have recognized that there are externalities and stakeholder challenges facing all companies in all geographies that need to be analyzed and incorporated into investment analysis.

More recently, ESG and sustainability have evolved toward the concept of sustainable investment and development, which is a long-term, multi-stakeholder approach to value creation with a greater focus on real world outcomes and quantifying impact.

Sustainable Investment Opportunities in Emerging Markets

With respect to emerging markets, the evolution of sustainability is just as important as the growth opportunity. However, several development challenges need to be addressed.

We expect ongoing, robust emerging market growth over the coming decades to drive urbanization and demographics, supporting additional growth drivers of consumption, connectivity and innovation. Demographics should remain supportive of global growth as the world’s population is projected to rise, with urban growth largely generated from emerging markets. This growth, however, is not without its challenges, as highlighted the United Nations Sustainable Development Goals, which predict a significant funding gap in emerging economies that cannot be met by government spending alone. This means that there is a significant role for private capital to play in addressing the challenges of poverty, rising inequality, health and wellbeing, finite resources and climate change.

In response, we’ve seen a rise in corporate awareness, particularly from private enterprises. Many forces are driving this. For example, we are seeing a “societal pull and regulator push” in many emerging markets. Local government policymakers are also leading a new wave of governance and stewardship, while supported by voices from various stakeholders—and not just shareholders.

Stock exchanges are asking for more disclosures from companies; many are initially voluntary in nature but will eventually become mandatory. And finally, companies themselves are increasingly more open to engagement, and we have seen tremendous improvement in ESG disclosure in recent years, albeit often from a low base.

The Socio-Environmental Challenge

We are seeing a growing use of exclusions and divestments as a solution to shape the societal and environmental outcomes that we seek. Divestment agendas are top of mind for investors, who are pushing asset aligners to position themselves with supposed best practices.

But what happens when societal and environmental trade-offs occur? Thousands of emerging market communities where the local mine supports livelihoods will be impacted when those with unsustainable practices are forced to close. Or, for example, calls for a coal-dependent country like India to reduce its usage. In our view, energy security and its vital role in economic development is far more important than long-term climate trends, from a broader societal perspective.

The reality is, these exclusions apply to countries with human rights violations, which in many cases can force businesses to cease trading through a divestment agenda, that can often hit the most vulnerable, local workers the most, leaving the intended real targets of political leadership, unaffected.

Ultimately, we see ourselves as pragmatic investors who recognize that the world is imperfect. The perfect company rarely exists. We believe compromise and a flexible approach is required when investing in emerging markets given the multiple shades of gray we encounter.


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