Moneda's Echeverría looks to ESG themes to guide his investments
March 27, 2019 |
Choosing between investment returns and sustainability is a thing of the past, says the founder and president of Chile's Moneda Asset Management.
Chile's salmon fisheries have cut back on the use of antibiotics, reduced the number of fish in pens and even improved their diet. Such fishfriendly actions by growers has little to do with any new affection for salmon. They’re part of a successful business strategy. The Chilean salmon industry not only boasts higher productivity and lower costs, it’s narrowed the price gap with the more expensive salmon grown in Norway, known for its responsible and sustainable farming practices.
Just as important, the Chilean industry is attracting a new kind of investor, one who looks beyond a company’s bottom line and judges its commitment to environmental, social and governance issues. For Pablo Echeverría, ESG is a cornerstone in his investment philosophy throughout Latin America. “Consumers are looking for organic and healthy products, and they are willing to pay an extra price for them,” says the founder and president of Santiago-based Moneda Asset Management, with more than $9 billion under management.
“Responsible investments not only allow us to contribute to society, environmental care and the improvement of corporate governance, but it is good business,” says Echeverría, the first fund manager in Chile to sign the United Nations-backed Principles for Responsible Investment (PRI), in April 2018. “It reduces a company’s capital costs because more investors are interested in investing in the company.”
Recent returns underscore that point. Between September 2007 and January 2019, the MSCI Emerging Markets (EM) ESG Leaders Index, which includes the likes of Brazilian bank Itaú Unibanco and Chinese gaming giant Tencent Holdings, posted a 177% return com- pared with 118% by a comparable index without ESG factors.
Echeverría says demand for responsible investment is coming not only from consumers who favor brands that share their values, but also from institutional investors, led by foreigners but with a growing number of Latin Americans. “This is a trend that is going to continue to grow,” he says.
PRI has close to 2,100 signatories worldwide, including asset owners, investment funds and service providers, which all told have $80 trillion assets under management. The signatories — there are 75 in Latin America and the Caribbean — pledge to incorporate ESG analysis into their investment decision-making. This includes picking assets that are making efforts to cut carbon emissions or promote gender diversity and equal pay in their workforce. It’s also about the fair treatment of minority shareholders, respect for neighboring communities and a commitment to combat corruption.
Echeverría says ESG has encouraged more companies to publish sustainability reports, a tool that responsible investors can use to decide on investing in these companies or not.
Some Latin American capital markets are also promoting ESG principles. Since 2015, listed companies in Peru have had to publish corporate sustainability reports, and companies in Chile are encouraged to improve corporate governance. Argentina’s BYMA stock exchange plans to create an ESG index of 15 local issuers, building on the Dow Jones Sustainability Indices in the region. The Mexican Stock Exchange is working on a green bond market.
Echeverría says Moneda has pulled out of some assets that have failed the ESG test, though he declined to name any, citing a policy that his company doesn’t discuss companies where it invests. Even so, Moneda hasn’t divested its holding in fossil fuels as funds in Ireland and New York have done recently. Instead, Moneda remains committed to energy companies that have “a good ESG performance,” when it comes to other practices, such as protecting the environment and nearby communities and promoting women to senior roles. The companies also need “a good future strategic plan of migration toward renewable energies,” Echeverría says.
ESG is still in its infancy in Latin America and challenges abound. For starters, qualifying as ESG-friendly is a huge cost for companies to implement, requiring them to upgrade processes and adopt new technology. But the long-term gain is greater efficiency and productivity, as in the case of Chile’s salmon industry, Echeverría says. “I think that the discussion of choosing or not between returns and/or sustainability in investments is a thing of the past,” he says. “It’s no longer just about the return. You have to do things well.”