2) Environmental and social considerations
Every sector has inherent social and environmental risks. Managers of global, sustainable funds should understand which risks are exacerbated, or ameliorated, by the location of company operations.
Some are obvious – employment rights are less of a concern in well-regulated regions like the EU – but others are much more country specific (water scarcity, for example) and will require company engagement to ascertain details on the level of risk exposure.
The picture is more complicated with multinational firms and those with complex supply chains. In these instances, investors should look for reassurance that good sustainability governance processes are in place.
In addition, many sustainable fund managers have now set net zero targets and are assessing the carbon footprint of their investments.
This is an emerging area of practice, but it could render markets with slower transitions to electrification and lower carbon energy sources marginally less attractive to investors with stretching net zero targets.
3) Human rights and bribery & corruption
These two ESG issues vary so significantly by geography that they warrant closer inspection. Sustainable bond funds may well have exposure to government debt.
From an ESG perspective, fund managers are generally comfortable holding debt issued by democratically-elected governments that uphold the rule of law.
However, concerns can arise with government issuers that have poor human rights records or high levels of corruption: such holdings bring increased risk and clients may feel uncomfortable holding securities that benefit undemocratic regimes.
There are similar concerns with equity holdings and human rights, particularly in some emerging economies where enforcement of labour rights may be weak and where bribery may be more commonplace.
As a result, fund managers often use external human rights indices to determine the geographic boundaries of their investible universe, with low-ranking countries excluded.
4) Governance
Governance norms vary significantly by market. In France, for example, it is illegal for companies to collect ethnicity data, hampering investor efforts to understand workforce and board diversity.
Other governance challenges include the trend for much higher levels of executive pay in the US and the introduction of golden shares in China, whereby the government has taken a small stake in a number of tech companies.
Across the EU, large ownership stakes retained by founding-families is not uncommon, even in listed firms, thereby diluting the voice of minority shareholders.
As a result, investors may decide to steer clear of companies where family shareholding exceeds a certain threshold.
