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SRI expert: don't assume US beats EMs on corporate governance

SRI expert: don't assume US beats EMs on corporate governance

The idea that corporate governance in developed markets is always better than in developing countries is misplaced, according to Newton Investment Management’s head of responsible investment Sandra Carlisle.

Speaking to Modern Investor, she said she is finding operating in the US challenging from an ESG perspective. Meanwhile, she said some EM firms are very well and transparently run.

‘Corporate governance is not always better in developed markets than in emerging countries. According to our criteria, some situations in the US are far from ideal,’ she said.

‘We don’t like situations when minority shareholders are put aside. We also appreciate the CEO and chairman having separate roles, which rarely happens in the US,’ she said.

‘Also, we don’t like people staying on the company’s board for too long, like 20 years, as well as too high executive remunerations.’

Carlisle said corporate governance is one of the two big themes she’s strongly focusing on at the moment, as it’s becoming increasingly important when assessing the long-term profitability of a company.

‘It’s about making companies looking after the shareholders’ interests. Well-run corporates tend to do much better in the long run,’ she said.

‘After all, the financial crisis was a failure of governance and worked as a wake-up call for many investors who strongly believed in the neoclassical theory of efficient markets.’

Climate change

The other theme Carlisle is monitoring is climate change, saying the COP21 UN Conference in Paris at the end of this year might have an impact on Newton’s portfolios.

‘Countries will submit national action plans on how to tackle climate change. The big question, again, is about developed vs developing countries: who has to do what? How to allocate responsibility?’

She said 10 years ago Germany was the leading country for wind and solar energy production. But now China has become one of the biggest installers and exporters of renewable power.

‘The issue China has with pollution is actually creating interesting opportunities. Despite all the criticism, China has shown a real commitment to change its energy mix.’

SRI method

In assessing the SRI characteristics of a company, Carlisle takes into consideration all the firms recommended by Newton’s analysts.

If her team assesses a company as weak from an ESG perspective, it doesn’t mean that the portfolio manager cannot invest in it.

‘In that case, the question is: are the returns high enough for the ESG risk we’re taking? After all, the fund manager is the person who invests, and he’s the one who has to make the final call,’ she said.

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