Lessons Learned from 926 Engagement Meetings in Emerging Markets

Posted on February 3, 2021

Palle Ellemann
Palle Ellemann
Director Engagement Services

When Sustainalytics (GES[1]) initiated the Emerging Markets (EM) Engagement program as a pilot project in 2009, the scale, scope and impact were undetermined factors. Based on the successful execution of the program methodology in the African and Middle Eastern regions during the pilot stage, the full program launched in 2010 to cover all major emerging markets. After the project close in July 2020, the program accounts for 926 meetings with companies in emerging markets.

This engagement has been driven by investors seeing opportunities to close management gaps in the material ESG issues that are often more elevated for emerging markets compared to developed markets. Companies in emerging market regions in these specific engagements often had limited or no ESG risk management or relevant ESG disclosure in place. These companies can be challenging for investors to navigate as the company’s ESG considerations represent a blind spot of unknown risks. The engagement can support investors with obtaining and analyzing ESG information not disclosed in a structured way, building a foundation for positive change in the mitigation of material ESG issues. Over the course of more than ten years of this program, Sustainalytics’ engagement supported many EM companies in developing their first Sustainability/ESG report. Many companies established inaugural reporting based on ESG risk management recommendations highlighting material ESG issues, and providing constructive feedback regarding ESG disclosure for investors. Sustainalytics’ engagement leadership aims to gain executive-level commitment for transformation to secure the ability and resource allocation to execute change successfully.

Engagement for Change

Positive engagement results were achieved in 86 percent of engagements under this program where more than one meeting with a company took place. Sustainalytics’ customized focus and recommendations produce diverse and impactful engagement results for each company. Positive developments include ESG disclosure improvement, product strategy and governance enhancements, and modifications to occupational safety programs.

One notable success story comes from engagement with a large South-East Asian real estate developer. The company had minimal ESG disclosure when first engaged by Sustainalytics. Despite extensive construction activities, there was no safety performance disclosure even though poor safety management practices were identified. Sustainalytics addressed occupational health and safety risks, requesting insight into safety performance, and suggested other impactful actions related to ESG governance and disclosure. The company hired an international safety expert to build a robust safety management system, and since then, the company has produced ongoing detailed safety performance reports, showing substantial improvements. Simultaneously, the company established a proper ESG risk management system and improved ESG disclosure for investors. The company even demonstrated a progressive commitment to carbon neutrality for a large part of the business.

Looking at another example from a major grocery chain in Latin America, short-term cost control was prioritized over long-term risk management at the outset of Sustainalytics’ engagement. Over time, the company realized the long-term materiality of proactive ESG risk management, the value of addressing investor ESG concerns and the increasing consumer consciousness regarding sustainability. The engagement supported the company’s materiality assessment, identifying multiple ESG risks within its operations and complex supply chain. The retailer is now an industry leader in sustainability and is the preferred choice for a fast-growing segment of consumers who seek sustainable products even when it’s more expensive to do so.

Change for a large and complex organization takes time, so patience and persistency are vital for producing engagement results. Engagement with a sizeable Russian bank yielded few developments in the first four years because the crucial top-level ESG commitment ESG was not in place. Persisting with practical recommendations and stressing investors’ concern for managing ESG risk, eventually yielded the intended results. The board signalled a strategic focus on ESG, moving quickly to establish proper ESG governance and materiality assessment–even forming an ESG team within the company to drive implementation. The company also began providing disclosure on corruption cases and related employee dismissals–an unusually high level of transparency in context for this type of company.

Engagement Driven by Research and Insight

Building trust in ESG risk-driven engagement is crucial when presenting constructive suggestions to address material ESG issues. The Engagement Services team prepares its recommendations on Sustainalytics’ in-depth research, illustrating an authentic understanding of the company and political, cultural and socio-economic context within emerging markets. Engagement aims to align the objectives of investors with the objectives of the companies within their portfolio. Sustainalytics can help companies understand international trends and guidelines, supporting change and risk management with additional ESG risk considerations related to emerging markets and investor concerns.

The Material Risk Engagement (MRE) service, launched in March 2020, is intended to engage companies on material ESG issues globally where there are significant ESG risk management concerns. Learn more about how Sustainalytics’ Material Risk Engagement and other Active Ownership services can reduce investor risks.

 

[1] Sustainalytics acquired GES International in 2019. The engagement was initiated by GES and continued within Sustainalytics.