ESG's Early Adopters
In emerging markets, many exchanges and regulators are setting forth enhanced standards, often aimed at bolstering shareholder protections.10/12/2020
As engaged shareholders and bondholders in our portfolio companies and issuers, we seek to foster their sustainability—and profitability. We also strive to be good global neighbors and citizens. We believe economic progress requires a healthy environment where people can live and work and a broad middle class supporting economic growth and social inclusion. Economic progress is also supported by transparent corporate governance structures that can help attract domestic and international capital. Working diligently to help our clients reach their financial goals, we are mindful of the role of capital in shaping the world we want to live in.
Our clients' assets are tied to their goals and aspirations. As a fiduciary, we have a legal and ethical obligation to act in our clients' best interest. Fostering a client-centric culture begins with understanding clients' goals and creating investment solutions designed to support those goals over the long term. It continues with maintaining and enforcing a strict Conflicts Policy and Code of Ethics for all employees. In addition, we strive to align employee incentives with clients' interests over the long term. Accordingly, our portfolio managers are:
To help manage risk across our strategies, we take a disciplined approach to risk management. Our Chief Investment Officer oversees key investment team functions through regular meetings and one-on-one interaction with portfolio managers and investment group leaders. Portfolio managers understand material risks in portfolios through in-depth analysis and proprietary research into our investee companies, including ESG.
We also have a Corporate Governance and Stewardship Sub-Committee charged with implementing Matthews Asia’s Responsible Investment activities, active ownership principles, stewardship, and ESG integration. Together with the Proxy Working Group, this group also oversees the proxy voting process.
Paul Matthews, founder of Matthews Asia, started our firm with a strong belief in the long-term growth potential of Asia. He fostered a culture of carefully considering corporate governance structures as part of our due diligence process. A deep appreciation of corporate governance is built into our DNA. Good governance is important in all markets where we invest, and especially so in emerging and frontier markets. When assessing management quality, we look at how well a company articulates and executes its long-term vision. We believe high-quality businesses run by capable and principled managers are healthier and more sustainable. Our business-quality assessment also includes determining the ability of a company to grow sales and profits with attractive returns over the long term.
We require trust, transparency and accountability from our investee companies and entities. As part of our proprietary investment research, we typically consider a company's:
To develop a 360-degree view of investee companies, our due diligence process includes meetings with one or more of the following stakeholders: company management, employees, customers, suppliers, research and civic organizations. This helps us gauge the strength and quality of management teams, as well as the viability of a company's business model. We may also consider a company's potential for successfully entering new areas of business by leveraging existing strengths. In markets that are rapidly growing and still inherently inefficient, we believe identifying companies with strong corporate governance is essential to helping manage our clients' investments.
Environmental, social and governance (ESG) factors are often synonymous with long-term investing. Accordingly, ESG factors tend to be highly compatible with our bottom-up, fundamental investment process. We see at least two potential benefits to investing with a long-term view. Issuers focused on the long term may be better equipped to identity future growth opportunities ahead of competitors. This helps issuers invest in research and development, production and marketing resources ahead of time and proactively create new growth opportunities or benefit significantly when those opportunities materialize. In addition, companies that look ahead can scan the horizon for long-term threats to their businesses. These forward-looking issuers can potentially invest in mitigating strategies and address material risks to their long-term prospects more effectively.
Corporate governance is the ESG factor we look at most closely across all our portfolios to identify risks. We believe governance influences social and environmental factors, providing a starting point for analysis. While we generally do not employ negative screens based on environmental or social factors, poor corporate governance may exclude an issuer from consideration for our portfolios. In addition, our portfolios are typically not constrained by sector or industry, and often look quite different from our benchmarks. In-depth knowledge of local markets helps us to evaluate and prioritize ESG-related risks according to their potential impact on portfolios. In some of our portfolios, ESG considerations may rank high. In other portfolios, ESG considerations may be simply one set of inputs among many that we consider as part of our fundamental research.
In addition to identifying risks, ESG factors can help identify opportunities. As incomes rise across markets where we invest, domestic consumers will naturally seek to improve the quality of their lives, creating opportunities for businesses alert to this trend. Governments across Asia, as well as broader emerging markets, are also focused on improving the quality of their economic growth, which may involve closer regulation of environmental and social issues.
We believe the developing world’s response to ESG challenges will have a major impact on businesses worldwide. Companies that ignore consumer preferences may miss out on business opportunities, while those that ignore regulatory risks may face higher regulatory costs and risk damaging their brands. In contrast, companies with strong or improving ESG track records may find it easier to attract capital from increasingly sophisticated, institutional capital market participants.
Through our fundamental approach to investment research, we get to know our portfolio holdings very well. In some cases, we may consider issuers that faced ESG challenges in the past but are now improving. Inflection points, such as companies taking positive steps to improve their corporate governance structures, can present attractive buying opportunities. Thus, we are open to investing in technologies and industries that can help bridge the gap toward better ESG solutions, but only after careful research, analysis and due diligence.
Committed to incorporating ESG considerations within the very fabric of our investment process
ESG considerations are not a specific requirement for all portfolios at Matthews Asia. ESG factors can vary over different periods and can evolve over time. They may also be difficult to apply consistently across regions, countries or sectors. There can be no guarantee that a company deemed to meet ESG standards will actually conduct its affairs in a manner that is less destructive to the environment, or promote positive social and economic developments. Parameters set by Matthews Asia are subject to change.
Active ownership and stewardship form the cornerstone of our commitment to foster strong corporate governance. With a long history of investing in Asia and emerging markets, we are often a significant shareholder in company registries. Each year, we have roughly 2,700 touchpoints throughout Asia and across broader emerging markets, which can include company, supplier, customer and other stakeholder meetings. With a large team that has a strong background in Asia and emerging markets, we are fluent in the region's languages and familiar with its cultures. Respectful of diverse cultural landscapes, we take an in-person approach to company engagement, which we find more productive than filing shareholder resolutions. We also take a thoughtful and conscientious approach to voting proxies on behalf of our clients.
We take an active role in key organizations that advance and protect the interests of our clients. Our objective is to raise the standards of the companies and markets in which we invest on behalf of our clients. As a global investor, we understand that regulations play an important part in setting corporate governance standards for each country. We believe that a good regulatory framework complements market forces, while looking after the interests of a variety of stakeholders.
We strive to maintain active relationships with relevant market institutions, governmental and public bodies that may be helpful for keeping up to date with local legislation and market practice for improving the institutional framework. We also support different forums for promotion of good market practice, corporate governance, other responsible practices and other relevant topics that may be in the joint interest of our investors. Some of these organizations with which we engage include the United Nations Principles for Responsible Investment, the Asian Corporate Governance Association (ACGA), the International Corporate Governance Network (ICGN), the Sustainable Accounting Standards Board (SASB), and the CDP.
The United Nations Principles for Responsible Investment (UNPRI) encourage and promote investing with a long-term view, a goal deeply aligned with our mission. As a signatory to the UNPRI, we are committed to reporting our responsible investing activities every year and welcome dialogue with our clients about their goals and interests related to responsible investing. We strive to provide investors with regular communication about issues that impact financial performance, including ESG topics. To educate and engage our clients, we publish insights, commentaries and articles describing our investment approach and philosophy.
For investors interested in capturing Asia's growth through an ESG lens, we offer a dedicated Asia ESG equity strategy. Similar to all of our strategies, the Matthews Asia ESG strategy follows an investment-first approach to ESG integration. This simply means that companies must first be identified as sound long-term investments before we start to look at their ESG record. We typically look to invest in companies that generate sustainable cash flows while offering products and services that improve quality of life and have positive environmental, social, governance and economic outcomes for the stakeholders.
We differentiate the Matthews Asia ESG strategy from other strategies within the firm by using a more expansive, positive-screening ESG factor framework focused on positive ESG outcomes. This framework currently includes over 20 ESG criteria to analyze our current holdings and prospective investments. Examples of environmental factors that may be considered include low environmental footprint, pollution alleviation and resource management. Examples of social factors encompass financial inclusion, affordable products and services, workplace diversity and employee welfare. Examples of governance factors include board independence, stated sustainability policy, and alignment of interests of shareholders and management. Holdings in this strategy generally have exposure to at least one or more of these material factors.
Our active due diligence process for the Matthews Asia ESG strategy is based on proprietary research, rather than third-party ESG ratings. By conducting proprietary research, we believe we improve the quality of the ESG inputs we use in our investment process and broaden the opportunity set by including companies that may not be rated by third-party providers. We do not employ negative screens and where possible we look to go above and beyond ESG integration to identify investments that generate positive outcomes within the communities where the companies have operations or conduct business. We see this as a natural evolution of our existing investment process.
Investments involve risk. Past performance is no guarantee of future results. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation.
Matthews Asia is the brand for Matthews International Capital Management, LLC and its direct and indirect subsidiaries.
The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. The views and information discussed herein are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. This document does not constitute investment advice or an offer to provide investment advisory or investment management services, or the solicitation of an offer to provide investment advisory or investment management services, in any jurisdiction in which an offer or solicitation would be unlawful under the securities law of that jurisdiction. This document may not be reproduced in any form or transmitted to any person without authorization from the issuer.