By Sameer Sharma
Asset managers have a major role to play in helping to solve some of the most pressing problems the world currently faces. As a link between the providers of funding and those who need it, they are in a privileged position. Providers of capital must make the most of the opportunity they have to improve the world in which we all live in, as well as grow the value of their clients’ assets over the full market cycle. As the previous generation gradually passes on the baton to the millennials, asset managers are increasingly being assessed on the values they uphold, the ethics they promote and the wider role they have to play in improving the society in which they live in. Even other more traditional providers of debt capital such as banks must demonstrate their capacities to develop meaningful investment solutions that meet today’s challenges and help finance sustainable economic growth.
This sustainable form of investing tends to have two pillars – integration and active ownership. Environmental, Social, and Corporate Governance (ESG) considerations are integrated throughout investment processes through universe screening, investment selection, portfolio construction and engagement. Managers are also committed to continuously increasing transparency of reporting to clients on ESG impacts and on active ownership activity.
There is an increasingly belief with an increasing degree of quantitative backing behind this which shows that ESG tilts and long term returns are positively correlated to each other. Well-governed businesses with responsible practices can make a positive contribution to client portfolios over the long term. Both public listed and private companies which seek capital must publish ESG reports which are increasingly scraped in order to allow Natural Language Processing models to build a better picture of the firm.
Sustainability will be a long-term driver for change in markets, countries, sectors and companies that will create opportunities for fruitful investment. Therefore, investors and credit providers today want to participate more and more in the investment returns these opportunities will generate. Investors are becoming increasingly active. The likes of Blackrock are putting client money behind ESG weighted funds and look at ESG scores when voting in shareholders’ or Board meetings.
Fund managers are expected to be active and responsible owners who incorporate ESG criteria when voting which helps to drive positive change. To be clear, even within the Sub Saharan African private equity world today, private equity managers need to demonstrate that they focus on ESG or impact investment goals in order to obtain funding from their traditional investor base including Development Finance Institutions.
We should of course keep in mind that these are early days still. There is still some work to do when it comes to standardizing these ESG scores across the industry. While it would not be true to say that markets have completed shifted to ESG, it is quite clear that they are moving in this direction and fast. Let us also make no mistake, fund managers and credit providers care about returns, but there is a realization that there is no long term trade off between ESG and sustainable returns.
The shareholder base of the non-financial listed companies tends to be patrimonial.
Sustainable investing does not start and end with policy papers
In the case of Mauritius, very little progress has been made on this front beyond a few announcements including by one large listed company in particular which probably understands that slightly better debt pricing can be obtained in USD by going the ESG way. Unlike in most emerging and developed markets, the shareholder base of the non-financial listed companies tends to be patrimonial and the reliance on equity markets as an alternative to traditional bank debt funding has remained low. The local institutional investor base is not very sophisticated and tends to be quite passive. When it comes to the corporate debt market, there has been so much excess liquidity and so much desperation by institutional investors and banks for yields that it has mainly been a large borrower’s market.
It is hard to even think about ESG when the ball is not on the side of the providers of capital. Listed company quarterly reporting standards are poor given their abridged nature, and while most frontier markets have moved further ahead on the quarterly reporting front, Mauritius has not done much on this front over the past decade and a half. The local stock market tends to see poor turnover to market capitalisation ratios and high transaction costs. You need a dynamic market before you even push for ESG, and we do not have a dynamic market in Mauritius.
Being a small country, very often sponsors of institutional funds also have overlapping interests in other areas as well. On the public side, the now dying National Pension Fund never really professionalized itself while the newly created Mauritius Investment Corporation has also not clearly defined its investment objectives beyond saying that returns do not matter given its focus on “love and care”.
On the regulatory front, we have also not seen any moves by the Bank of Mauritius to look at ways to promote ESG financing by banks by reviewing risk weightings based on ESG scores (which would be calculated by a credible and independent body following international best practice and operate in full transparency) which could meaningfully tilt lending behaviour in the longer term. Sustainable investing does not start and end with policy papers on green bonds and green bond issuance. Without a greater use of equity markets by listed companies, given their wish to not dilute family control, and without a more activist institutional investor base, it would also not make a lot of sense for equity indices to be ESG tilted.
Listed company quarterly reporting standards are poor given their abridged nature.
While the public equity markets may continue to show limitations going forward, given high debt to free cash flow levels within the non-financial firms and the low likelihood of any public share issuance, the private equity space may see more traction. For example, highly indebted companies may look to sell assets or share investment risks on projects which need more financing/restructuring or financing for new projects where family shareholding dilution concerns on the holding company will not be at risk. Given the low level of gross national savings to GDP (and high public and private debt levels), private Mauritian firms may need to depend more on foreign investors who today demand ESG convergence.
Is there a way without the will?
For decades, the rentier economy and the system of political patronage have co-existed and created high barriers to entry and moral hazard. This is because policy makers have consistently provided backstops in the form of various subsidies, cheap bailouts and perks to many sectors of the economy. The effective corporate tax rates companies pay are also today not impacted by any ESG score today which could also meaningfully tilt corporate behaviour.
Lastly, if the government is interested in promoting a more inclusive and socially responsible society in Mauritius, it should perhaps start with its many public majority owned companies when it comes to corporate disclosures, Key Performance Indicators setting, governance structure enhancements and its ESG goals. For example, LUX and New Mauritius Hotels have disclosed more about their bailouts to the public than the MIC has disclosed. The likes of Mauritius Telecom and the State Bank of Mauritius have miles to go when it comes to enhancing governance frameworks, corporate disclosures and moving towards the ESG way.
ESG is the future, but whether Mauritian policy makers will move in this direction or not remains an open question.