Green hedges

Developing market ESG funds are on the up but transparency concerns need attention.

Every asset manager will tell you that ESG is deeply incorporated into the heart of their investment process and the marketing material for every new fund launch has an ESG section somewhere. It is clear that ESG is now extremely important to most asset managers (and their investors). A senior corporate finance advisor in Brazil tells us, “ESG funds are clearly on the up, it’s a matter of investor demand and you can see a substantial increase in demand.”

The problem is that while corporates in developed countries are starting to invest in properly measuring and monitoring ESG risks, most company boards and management teams in Latin America do not have a clear insight into the ESG profile of their own businesses.

This is why two recent fund launches piqued our interest:

Last month, Somerset Capital launched their Emerging Markets Future Leaders Fund, with USD 350 million seed capital to invest in businesses that are “assessed according to Somerset’s ESG criteria.”

“I think it is in our hands to make [LatAm markets] grow as we are the ones with the resources.”

Senior Institutional Manager at a Global Investment Fund.

A week later, Arisaig Partners unveiled its Next Generation Fund targeting listed businesses in emerging markets that create “positive social and environmental impacts.” Arisaig even brought in a “former impact consultant” to help manage the fund.

Sounds great, but a senior corporate finance advisor in Brazil has some words of caution, “[ESG] is something to be very careful of in Brazil. Particularly regarding the Amazon deforestation programme. There is a marketing strategy by which local companies try to please investors without significantly taking measures to solve the problem.”

“If the government does not collaborate, green corporate policies will not have a significant impact.”

Senior corporate finance advisor.

An emerging market fund manager agreed, “Being able to distinguish between those that take corporate governance and sustainability issues seriously and those that don’t will be absolutely crucial in identifying future winners and losers.”

A company’s corporate governance can’t easily be measured but you can build a solid picture of how seriously it is taken and the reputation of the management and board by speaking to well-placed locals. Equally, you can’t properly evaluate the social and environmental impact a business is having in a local context without independently speaking to people on the ground. We do exactly this for many of our clients.

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