Pakistan Macro Blog: Investing for Good in Pakistan: embracing ESG

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Dear Friends,

‘There are decades where nothing happens; and there are weeks where decades happen”
“Investing for Good” or ESG investment is a theme which we covered in our webinars this month. We hosted the legendary Mark Mobius, who now manages a ESG focused emerging markets fund and his colleague Usman Ali, who is a Partner at Mobius Capital. Mark is a co-author of “Invest for Good: A healthier world and a wealthier you”, along with his colleagues Carlos von Hardenberg and Greg Konieczny. 

Global pension funds are increasingly adopting ESG as a requirement for the asset managers they support. According to GSIA (Global Sustainable Investment Alliance) assets worth more than $30 trillion now follow ESG screening. It is critical for companies in Pakistan to recognize, understand,and actively adopt this investment framework in order to remain “investable” for global investors. 

The key point of the book and the talks by Mark and Usman was that contrary to popular perception, ESG is not about ethical investment or about corporate philanthropy. It is good business. By consciously focusing on areas like good governance, and by creating a positive impact on wider stakeholders such as employees, society, community and environment, companies inherently improve their own financial health.

Investors also reward such companies. Businesses with have superior ESG credentials tend to trade at a premium multiple. Even in the emerging markets, MSCI ESG EM Index has outperformed the broader MSCI EM Index over the past 5 and 10 years (see chart below). The out-performance is more pronounced during the past 12 months.  
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This is a completely new paradigm shift which requires a deeper understanding. We have grown up following the classical “Friedman” corporate philosophy, where the only goal of a company is to maximize corporate profits. Iconic corporate titans of the 70s and 80s such as Jack Welch were flag bearers of this. In this corporate view, social responsibility or ESG is a viewed as a cost, which is at a conflict with the purpose of profit maximization. New thinking, now becoming mainstream, challenges this notion. Companies can only sustain long term profits if they are aligned with a “purpose”. 

In his book, “Grow the pie” (click here) London Business School’s Alex Edmunds, describes “purpose” as the question “How is the world a better place by your company being there”. For us at KASB, our purpose it to democratize access to investments. We want a small saver to have the ability to share the profit and loss of large businesses which dominate Pakistan. We want small savers to understand and feel empowered by their rights to influence corporate decisions by their ability to vote. Equity, contrary to debt, is inherently democratic and fair. Pakistan needs more of both. 

Until not too long a time, movements such as the BDS Movement (Boycott, Divestment and Sanctions) and ethical sanctioning was considered to be against the principles of capitalism and free markets. Rhodes Must Fall in Oxford failed to yield any results in 2015. But last few weeks, the world changed. Oriel College’s trustees have voted to move Cecil Rhodes to the museum, Princeton considers Woodrow Wilson’s unfit to be associated with its school. Churchill, the hero of every Conservative party member had to be rescued by encasing him inside a box. The box read, “Caution, racist inside”. Diversity, both of race and gender are becoming corporate preconditions. 

Our research report “Who Owns Pakistan” published last year, showed that only 10% of the top 100 companies in Pakistan have female board members. Even, then for most either it was their family members. Most ladies were on multiple boards – so the number of female board members of top 100 companies was less than 10. 

Pakistan’s market is dominated by oil and gas and commodity companies in sectors such as fertilizers and cements. Naturally, these sectors would not screen well on ESG. This means they have to take extra steps to comply and even more to document and show the proof of this in their investment material. 

Pakistani companies are particularly poor on investor communication. Hardly any company has an up to date “Investment Presentation” on its website. Very few have dedicated IR officers. Even fewer record their analyst presentation or place their transcripts on Bloomberg or on their websites. These should be low hanging fruits. Greater transparency and better communication is essential for gaining investor trust. Companies need greater interaction with analysts. In Europe, quarterly roadshows by company management is a norm.  

My team and I are working on a detailed study on ESG and we are applying the framework to Pakistan. W at KASB will be evangelizing ESG even more going forward. We feel its good business.  

I do not intend to single out Pakistan. In fact, last month I wrote about how PSX is more regulated and has better transparency than Frankfurt Stock Exchange. I gave the example of Wirecard (click here). As a tech analyst, I had a sell call on Wirecard back in 2016. Since then, that story has unfolded. The $20bn market cap has gone down to zero within a week. The loss of this fraud is almost half the size of overall Pakistani stock market. A massive scandal. If a fraud of even 1/10th this size would have happened in Pakistan, the media would be running wild, SECP would have set up an inquiry committee, NAB would have started an inquiry, and it would surely would have led to even further tightening of regulation and rules. In Frankfurt, however, life goes on. Measured response, rather than knee jerk over-reactions is also, sometimes, a sign of good governance. 

I am, yours truly,Ali
Farid Khwaja

* This is not research material and there is no investment recommendation in this blog. These are my personal views and do not represent the views of KASB Research team. 

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