When investing in emerging markets, we seek to assess the environmental, social and governance (ESG) risks and opportunities of the companies in our universe. That’s because we believe ESG factors are financially material and can affect a company’s performance – positively or negatively.

In our view, good governance and stewardship are vital to safeguard the way in which a company is managed and to ensure that it operates responsibly in relation to its customers, employees, shareholders, and the wider community.

We also believe that markets and companies that adopt best practices in corporate governance and risk management – including the management of environmental and social risks – are more likely to deliver sustainable, long-term investment performance.

The importance of first-hand engagement

Engaging with company management teams is key and a standard part of our equity investment process. We believe these interactions provide us with a more comprehensive view of a company. This includes current and future ESG risks that the firm needs to manage and opportunities from which it may benefit.

Meetings also provide the opportunity for us to discuss any areas of concern, share best practice and help drive positive change.

How does this work in practice?

One particularly fruitful company engagement was with Brazil’s rail transportation firm Rumo. Operating over eight states, the company transports everything from agricultural commodities and chemicals, to electronic goods and forestry products.

Rail transportation is less carbon-intensive than other forms of transport, particularly road haulage. As a result, we believe the company is aligned to United Nations Sustainable Development Goal (SDG) 9 – Industry, Innovation and Infrastructure.

Additionally, MSCI recently increased Rumo’s rating, citing improvements on carbon emissions and associated targets. However, despite these positives, we were concerned about the lack of diversity on Rumo’s board, which was made up exclusively of men.

Why diversity matters

In our view, making progress on diversity and inclusion is critical for the long-term sustainability of companies and economic growth.

We’re therefore committed to promoting diversity and inclusion through our investment activities. This includes setting specific representation targets at the board, management and workforce levels in respect of either gender or ethnicity and, if possible, other diversity characteristics.

While there’s a clear ethical argument for greater equality in the workforce, there’s also growing empirical evidence that a diverse board is good for business.

According to the Harvard Business Review, women bring different skills and perspectives to board meetings. They also tend to have a different approach to decision-making.1 In turn, research has shown that these dynamics tend to increase the collective intelligence of the board.2 And all this translates to real-world performance. Indeed, MSCI ESG Research shows that companies on the MSCI World Index with strong female leadership generated higher returns on equity versus those without.3

During our meeting with Rumo, we expressed our views on board diversity. We also encouraged management to internally assess and consider its own board structure.

Helping drive positive change

In 2020, we were therefore delighted when Rumo announced Janet Drysdale as the first female member of the board. Since then, she has been joined by Maria Rita Drummond. While not an independent appointment – Drummond is a legal counsel director of parent group Cosan Group – in our view this is an equally important appointment.

There’s still work to do. With only two females on a 10-strong board, Rumo falls short of the 30% Club’s target (the 30% Club is a group of chairs/CEOs campaigning for a minimum of 30% female representation on boards globally). Nonetheless, this is clearly a step in the right direction and we believe it bodes well for future appointments. It also illustrates the potential power of company engagement.

Final thoughts…

ESG engagement and active stewardship are central to our process. Through this, we believe we can clearly articulate our views, share best practice and help drive positive change. The ultimate goal is to help make companies into better businesses – and therefore better investments for our clients.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.