Incorporating ESG factors helps build best ideas portfolios

UBS Asset Management (UBS-AM) was bestowed two “Best Equity House” awards by Morningstar and Fund Selector Asia recently in 2021.

Geoffrey Wong, Head of Emerging Markets and Asia Pacific Equities says this speaks volumes of the team’s in-depth fundamental research process “which gives us the confidence to take high conviction stakes in quality companies and build best ideas portfolios for our investors.”

Part of this confidence also comes from knowing that he and the team looks at intangible factors like environment, social and governance (ESG) considerations before putting money to work. While these may be non-financial issues, they can damage the long-term value of companies.

ESG factors at work

Geoffrey cites an investment in a Korean power plant company that had plans to build more coal-powered plans in the region. The transition towards lower carbon emission is gaining momentum with investors increasingly diverting capital away from such companies. As a key investor, UBS-AM was actively involved in getting the company to phase out coal-powered plants. This includes co-signing a private letter to the board and a public letter to the government and a media article expressing our concerns. We also voted against the appointment of three board members during a extraordinary general meeting.
 
The company eventually confirmed that it will not purse the new coal plants outside of Korea. We are continuing the dialogue with the firm in relation to its coal phase-out timeline and action plan domestically and overseas.

ESG factors: part of investment process for almost ten years now

“ESG may be a buzz word these days but we have been looking at these factors long before they became ‘fashionable,” says Geoffrey. This winning Emerging Markets and Asia Pacific team has incorporated them into their investment process for almost ten years now.

Regular engagement with management is key to help companies improve ESG practices

The risk dashboard is the starting point for assessment. It shows an array of ESG data and comprises proprietary data and external databases and flags potential issues. “If our team still finds the company attractive, we will work colleagues in the SI team and engage regularly with management and board to improve their ESG practices. It usually takes a fair number of meetings to get our message across and the process is intense but necessary.”

ESG issues are real and can pose hidden risks and as long-term investors, we want to ensure that the long-term potential of our investments is preserved.

Geoffrey talks about three award-winning characteristics his emerging markets and Asia Pacific equities team have.