INVEST FOR GOOD CONTENTS Preface Acknowledgements Abbreviations Introduction The idea of the good company E and S Governance Reforming G Activism The investment continuum Measurement and performance The great awakening References Index PREFACE The idea of this book began germinating in the autumn of 2017, when the authors snatched a few hours from their globetrotting lives as investors in emerging markets, to step back from their jobs and discuss wider issues They agreed that two changes, in particular, were destabilising the status quo and generating both risks and opportunities for the professional investor The first was the rapid growth in recent years of ‘passive’ funds, so called because they substitute low-cost index-tracking investment for active investor engagement with portfolio companies The second profound change, which is, in some ways, a mirror image of the first, is the equally rapid growth in recent years of so-called ‘ESG’ (environment, social, governance) investing While the growth of passive investing is tantamount to a wholesale withdrawal of investors from engagement with portfolio companies, the growth of ESG investing is tantamount to demands by investors that portfolio companies should act in environmentally and socially responsible ways, while adhering to high standards of corporate governance Having identified the growth of passive and ESG investment as leitmotifs of the development of fund management in the early twenty-first century, the authors turned their attention to the implications for investment in emerging markets They knew that the encroachment of ever larger passive funds was less pronounced in emerging markets for two reasons: because active investing in emerging markets was still producing very strong returns, and because passive investing was fundamentally unsuited to these less liquid and less efficient markets They knew, too, that ESG investing faced more challenges in the emerging than in the mature markets, because of the relative lack of information and regulation and, consequently, a relative lack of companies in emerging markets that could pass or could be seen to pass the ESG tests In the light of these sea changes in investing, in general, and investing in emerging markets, in particular, the authors decided on two courses of action: set up a new company dedicated to active investing in emerging and frontier markets, with the aim to improve companies by focussing particularly on the ‘G’ component, i.e the way companies deal with corporate governance; and to write a book, this book, explaining why their approach is likely to succeed in emerging and ‘frontier’ markets and how they plan to implement their strategy The authors believe they are well qualified for both endeavours Dr Mark Mobius, co-founder of Mobius Capital Partners (MCP), has spent over 40 years seeking out and actively managing investments in emerging and frontier markets Before launching MCP in March 2018, Mark worked for the Franklin Templeton Investments fund management company, latterly as executive chairman of Templeton Emerging Markets Group During his tenure, the group expanded assets under management from US$100 million to over US$40 billion, and launched a number of emerging market and frontier funds, including private equity funds as well as open- and closed-end mutual funds Mark has played an important role in the development of international policy on emerging markets In 1999, he was asked to serve on the World Bank’s Global Corporate Governance Forum as a member of the Private Sector Advisory Group and was co-chairman of its Investor Responsibility Task Force He is also a member of the Economic Advisory Board of the International Finance Corporation He has also been on the supervisory board of OMV Petrom in Romania since 2010, and is a former non-executive director of Lukoil, the Russian oil company As undisputed doyen of emerging markets investment, Mark has been honoured with many industry awards and plaudits, including the Lifetime Achievement Award in Asset Management by Global Investor Magazine (2017); being ranked by Bloomberg Markets Magazine as one of the 50 Most Influential People (2011); an Africa Investor Index Series Award (2010); and being ranked by Asiamoney among the Top 100 Most Powerful and Influential People (2006) In 2007, he was featured in the comic book Mark Mobius: An Illustrated Biography Carlos von Hardenberg, one of Mobius Capital Partners’ three founding partners, has 19 years of experience in financial markets, of which 17 were spent with Franklin Templeton Investments, where he started as a research analyst based in Singapore and focused on South East Asia He lived and worked in Poland before settling in Istanbul, Turkey, for 10 years Carlos has spent a great deal of his time travelling in Asia, Latin America, Africa and Eastern Europe, visiting companies and identifying investment targets He managed country, regional and global emerging and frontier market portfolios Carlos was appointed lead manager of London Stock Exchange-listed Templeton Emerging Market Trust in 2015, where he delivered significant out-performance He established and managed one of the largest global frontier market funds of recent years Before joining Franklin Templeton, Carlos worked as a corporate finance analyst for Bear Stearns International in London and New York Greg Konieczny, the other founding partner of Mobius Capital Partners, has over 25 years of experience in financial markets, of which 22 years were spent at Franklin Templeton Investments, where he was recruited by Mark to conduct research into and manage Templeton Emerging Markets Group investments in Eastern Europe In 2010, Greg became fund manager of Fondul Proprietatea, the largest Romanian closed-end investment fund, and one of the largest London-listed funds, with US$ 2.7 billion in net assets The fund included large minority interests in private and state-controlled Romanian blue-chip companies During his seven-year engagement, he and his team in Bucharest helped to transform corporate governance standards in many of the portfolio companies, which contributed to significant improvements in their financial results and to increases in market valuations In his role as Director of Specialty Strategies for the whole of Templeton Emerging Markets Group, Greg was responsible for specialised country and regional strategies for Emerging Markets He and his team engaged with large portfolio companies in various sectors and regions to improve their governance Before joining Franklin Templeton, Greg worked for three years at Bank Gdanski, one of the largest financial institutions in Poland at the time It goes without saying that, with eight decades of experience in emerging markets investing between them, the authors write with some authority on the issues, ideas and concepts addressed in this book However, given that an implication of the environmental element of ESG investing is that most books would be better left as trees, why is this book – and, for that matter, a brand new fund management company, Mobius Capital Partners – necessary, and why now? There are two answers to these questions The first is that the authors are worried about the seemingly unstoppable advance of passive investing They acknowledge that its low management fees are attractive to investors, but they regard it as a threat to economic development When investors take no interest in the companies they invest in and blindly track some share index instead, they can exert no influence on the allocation of capital between companies, sectors or countries And it is the allocations of capital we make today that determines the kind of world we will live in tomorrow At a time when passive exchange-traded funds seem to be sweeping all before them, the authors want to stand up for and proclaim the virtues of active investment and its allocative power The second answer to ‘Why this book, why now?’ is that ESG as a template for investor choice, which the authors are committed to and approve of, is still in its infancy Despite all the hype, ESG investing remains a largely European phenomenon, and its dominant instrument remains ‘negative screening’: excluding companies that not pass ESG tests from portfolios The authors believe that the full beneficial potential of ESG investing will not be realised until it is combined with the active investment approach and its writ is extended to the emerging markets, where its impact on management and governance can the most good ACKNOWLEDGEMENTS We would like to thank Tom Lloyd for his excellent support in writing this book It is certainly not easy to work with three authors who are travelling all over the world and are seldom in one place at one time but Tom, in his calm and professional manner, has made the impossible possible We would also like to thank Anna von Hahn for her invaluable help in coordinating the project and ensuring we stayed focussed! Finally, a great thank you to the excellent team at Bloomsbury Business for guiding us so professionally through the publication process Our book could not have been in better hands ABBREVIATIONS CalPERS California Public Employees’ Retirement System CCC Clean Clothes Campaign CEDAW Convention on the Elimination of All Forms of Discrimination Against Women CEO chief executive officer CFO chief financial officer CFP corporate financial performance CPI Corruption Perceptions Index (Transparency International) CRP country risk premium DfID Department for International Development (UK) ERISA Employee Retirement Income Security Act (USA) ESG environment, social, governance ETF exchange-traded fund Eurosif European Sustainable Investment Forum FT France Télécom GDP gross domestic product Generation Z born in mid-1990s and afterwards GFI Global Financial Integrity GHGs greenhouse gases GRI Global Reporting Initiative GSIA Global Sustainable Investment Alliance GSM general shareholder meeting IFC International Finance Corporation (World Bank Group) IIRC International Integrated Reporting Council ILO International Labour Organization ISS Institutional Shareholder Services KPI key performance indicator Millennials born in the 1980s and early 1990s MSCI Morgan Stanley Capital International definition here, here effectiveness here and gender here impact of here investor influence on here lack of here measurement here micro here non-compliance here, here and politics here quality of here in Russia here Western standards here governance reform here, here and activism here and emerging markets here, here, here, here and governments here, here, here, here local demand for here, here, here macro here, here, here, here, here, here micro here, here, here, here, here sustainable here and value creation here governments anti-corruption policies here business influence on here, here and governance here, here and governance reform here, here, here, here statutory reporting requirements here and supply chain regulation here greenhouse gases (GHGs) here, here, here grey market here, here GRI (Global Reporting Initiative) here gross domestic profit (GDP) here, here, here, here Group Bolloré here group think here growth, economic here, here GSIA (Global Sustainable Investment Alliance) here, here, here, here 2016: Global Sustainable Investment Review here Hanjin Group here Hardenberg, Carlos von here, here, here, here Hardin, Garrett here Hayek, Friedrich von here Hayes, Denis here health and safety here, here, here, here hedge funds here Hidroelectrica (SoE, Romania) here, here, here hierarchy here holism here, here housing sector here, here Humanity United here human rights here, here human trafficking here, here, here Husk Power Systems here hydroelectric energy here, here, here, here Hyundai here, here, here Ibrahim, Mo here, here Iceland (retailer) here Idea (brand) here, here, here IIRC (International Integrated Reporting Council) here IMF (International Monetary Fund) here, here impact entrepreneurship here, here impact first investing here, here, here impact investing here, here, here, here, here, here Impact Summit Europe here incentives here independence of directors here, here, here, here of managers here India here, here, here, here indices ACWI (All Country World Index) Sustainable Impact Index, is here African Investing for Impact Barometer here CPI (Corruption Perceptions Index) here, here, here, here, here, here, here, here EM (emerging markets) ESG Leaders Index here and emerging markets here, here, here environmental here ESG here, here, here, here, here fixed-income here Global Compact 100 index here Jantzi Social Index here limitations of here, here, here, here, here, here MSCI EM index here and passive investing here, here, here, here, here S&P 500 Index here S&P Dow Jones Indices here STOXX Global ESG Leaders Index here Thomson Reuters Corporate Responsibility indices here indigenous people here Indonesia here industrial accidents here IndustriAll Global Union (IAGU), unFAIR PLAY! here industrial relations here, here inequality/equality here, here, here, here, here infrastructure here, here, here, here ING Group here initial public offerings (IPO) here, here, here, here, here, here insolvency here instability here Institutional Shareholder Services Inc (ISS) here, here, here International Finance Corporation (IFC) here, here International Integrated Reporting Council (IIRC) here International Labour Organization (ILO) here International Monetary Fund (IMF) here, here Internet here, here, here, here, here intimidation here investment see active investing; activist investing; community investing; ESG (environmental, social, governance) investing; ethical investing; impact first investing; impact investing; investors; passive investing; responsible investment; thematic investing; traditional investing investment funds here, here, here, here Berkshire Hathaway here, here Bridges Fund Management here, here Exchange Traded Funds (ETFs) here, here, here, here Fondul Proprietatea here, here hedge funds here managers here, here Mobius Capital Partners here, here mutual funds here NML Capital here pension funds here, here, here, here, here performance here Pershing Square Capital Management here Phenix Capital here Pictet Clean Energy fund here State Street (passive fund) here Third Point (hedge fund) here tracker funds here, here Vanguard here, here Working Capital fund here investors attraction of here, here, here, here collaboration with consumers here concerns of here, here conferences of here and divestment here and environmental issues here, here ESG here foreign here, here, here, here, here, here, here and governance reform here, here, here, here ignorance of here impact here, here impact first here, here, here influence/power of here, here, here, here, here, here, here, here see also activist investing liability of here local here millenials as here motivations here, here new paradigm here, here philanthropic here representation on boards here, here responsible here sustainable here thematic here, here traditional here, here, here types here UN Principles of Responsible Investment (PRI), adoption of here women here see also active investing; activist investing; minority shareholders; shareholders IPO (initial public offerings) here, here, here, here, here, here Israel here ISS (Institutional Shareholder Services Inc.) here, here, here Italy here Ivanishvili, Bidzina here, here Jae-in, Moon here Jae-yong, Lee here Jantzi Social Index here Japan here, here, here JBS S.A (Brazil) here Johannesburg Stock Exchange Integrated Reporting Standards here José Ugaz here Karakaş, Oğuzhan here Kenya here, here, here, here, here Key Performance Indicators (KPIs) here KiK (retailer) here Kim Sun-uk here Koehler, Dinah here, here Konieczny, Greg here, here, here, here Koninklijke Philips N.V here Korean Air here Kozlowski, Jaroslaw here, here KPIs (Key Performance Indicators) here Kyoto Protocol 1997 here, here labour disputes here, here labour relations here labour unions here Lagos here Latin America here law, rule of here, here leadership here, here, here Lee Jae-yong here LG (Lucky Goldstar) here Li, Xi here liability here listed companies see companies: listed litigation here, here Lloyd, William Forster here Loeb, Daniel here logos here losses here, here, here, here Lulache, Daniela here Luthai Textile (China) here MacArthur, Dame Ellen here management here, here, here, here Margvelashvili, Giorgi here markets here, here, here see also emerging markets; mature markets Marrakesh Accords 2001 here mature markets here, here, here, here and corruption here and cross-shareholdings here and returns here and screening here May, Theresa here McDonald’s here MCel here measurement here, here of impact investment here, here of performance here by proxy variables here see also analysis; data; indices meat processing industry here media here, here, here medical industry here mergers here, here Mexico here microfinance here MidAmerican Energy here Middle East Israel here Saudi Arabia here, here, here, here millenials here, here, here, here, here, here minority shareholders here, here and active investing here, here and governance here, here, here, here rights activism here, here, here M-KOPA here mobile phones here, here, here, here Mobius, Mark here, here, here, here Mobius Capital Partners here, here, here Mong-joon, Chung here monitoring here Moon Jae-in here Morningstar here M-Pesa here, here, here MSCI Inc here, here, here Musk, Elon here mutual funds here NASDAQ here National Advisory Board on Impact Investing (UK) here National Oceanic and Atmospheric Administration (NOAA) here NATO (North Atlantic Treaty Organisation) here negative screening here, here, here, here, here definition here market share here, here nepotism here, here Nestlé here Netherlands, The here networking here New Zealand here, here Nien Hsing Textile (China) here Nigeria here, here, here, here Nine Dragons Paper Holdings here NML Capital here non-profits here, here norms-based screening here, here, here Norway here Government Pension Fund Global (Norges) here, here Novogratz, Jacqueline here Ogilvy, David here oil industry here, here, here, here, here OPCOM (Romanian Electricity and Gas Market Operator) here open access problem here, here Orange (brand) here outsourcing here ownership here, here P&G (Procter & Gamble) here, here PacifiCorp here packaging here, here Pakistan here, here paper industry here parent companies here, here, here Park Geun-hye here passive investing here, here criticism of here, here, here, here definition here, here and emerging markets here, here, here ETFs (Exchange Traded Funds) here, here, here, here funds here, here, here, here, here and governance here paternalism here patronage here pay here, here, here, here, here, here executive here, here, here gender pay gap here, here pension funds here, here, here, here, here performance here, here, here, here, here and active investing here, here, here, here, here and compliance here composite returns here, here, here, here, here, here in emerging markets here, here, here failures here financial returns here, here, here, here, here, here, here measurement here non-financial returns here, here, here, here psychological returns here, here, here, here, here social returns here, here, here, here performance funds here Pershing Square Capital Management here Peru here pesticides here Petcu, Toma here pharmaceutical industry here Phenix Capital here philanthropy here, here, here, here, here, here Philippines here Pictet Clean Energy fund here plastics here, here recycling here, here, here reverse-vending machines (RVMS) here, here waste here, here Poland here politics here, here, here, here pollution here, here, here, here, here, here, here positive screening here, here, here, here, here poverty here, here, here power-trading here, here press here, here, here, here pressure groups here price fixing here prices of shares here, here, here, here, here stability of here transfer pricing here Prince, Chuck here Principles of Responsible Investment (PRI) here, here private markets here privatisation here, here, here pro bono work here, here Procter & Gamble (P&G) here, here profit here, here, here see also returns property rights here, here, here proxy advisers here proxy battles here, here proxy variables here psychological returns here, here, here, here publicity campaigns here, here public markets here public officials/civil servants here, here, here, here, here and corruption here, here, here Puchalski, Pawel here Putin, Vladimir here Quincy, James here race here, here Raina, Jyrki here Rana Plaza here ranking here recycling here, here, here, here, here redundancy here regulation here, here, here, here effectiveness here environmental here and ESG factors here financial here fuel efficiency here and governance reform here, here governmental here, here industrial here and minority shareholder rights here and political change here securities here of supply chains here regulatory authorities here religion here renewable energy here, here, here reporting company here, here costs of here data quality here and emerging markets here, here statutory here on UN Principles of Responsible Investment (PRI) here RepRisk ESG Business Intelligence here reputation here, here research here responsible investment here, here, here restructuring here, here returns here, here, here, here and active investing here, here composite here, here, here, here, here, here and emerging markets here, here, here financial here, here, here, here, here, here, here non-financial here, here, here, here psychological here, here, here, here, here social here, here, here, here reverse-vending machines (RVMS) here, here, here rights and governance here human here, here of indigenous people here property here, here, here of shareholders here, here, here, here, here, here of workers here, here, here, here, here, here risk here, here, here of corruption here management here, here reduction of here risk premium here, here, here Rockefeller Foundation here Rojas, Claudio here Romania here, here, here Romanian Electricity and Gas Market Operator (OPCOM) here rules see regulation Russia here, here, here, here, here S&P 500 Index here S&P Dow Jones Indices here Saakashvili, Mikheil here, here, here, here, here, here SAB Miller here, here Safaricom here, here, here safety here, here, here, here Samsung here, here Sanusi, Lamido here SASB (Sustainability Accounting Standards Board) here Saudi Arabia here, here, here, here Saudi Aramco here, here, here screening here, here, here and cultural differences here and emerging markets here, here negative here, here, here, here, here negative, definition here negative, market share here, here norms-based here, here, here positive here, here, here, here, here SDGs (Sustainable Development Goals, UN) here, here, here, here, here Securities and Exchange Commission (SEC, Poland) here, here Seton, Andrew here shareholders here, here, here meetings here, here, here rights here, here voting rights here, here, here, here see also minority shareholders share option schemes here shares here, here, here cross-shareholdings here, here, here and delisting of companies here non-voting here prices here, here, here, here ‘sin’ stocks here, here, here, here, here Shell here Singer, Paul here ‘sin’ stocks here, here, here, here, here slavery here, here, here, here small and medium-sized enterprises (SMEs) here, here, here Smith, Adam here Snap Inc here social (S) here, here addiction here and business sustainability here definition here and environmental gains here global supply chains here impact here opportunities here returns here, here, here, here Social Investment Forum here socially responsible investment (SRI) here social media here, here, here SoEs (state-owned enterprises) here, here, here, here, here, here, here solar power here, here, here Soon-sil, Choi here South Africa here, here, here, here, here South America Argentina here, here Brazil here Chile here, here Peru here South Korea here South Sea Bubble here, here sovereign debt here SpaceX here spectrum of capital (Bridges Fund Management) here, here stability here staffing here start-ups here, here state-owned enterprises (SoEs) here, here, here, here, here, here, here state ownership here State Street (passive fund) here stock exchanges here, here, here STOXX Global ESG Leaders Index here strikes here Students and Scholars Against Corporate Misbehaviour (SACOM) here subsidiaries here, here, here subsidies here, here Sudan here Sudan Accountability and Divestment Act (2007, USA) here Sun-uk, Kim here supply chains, global here, here, here, here, here Sustainability Accounting Standards Board (SASB) here sustainable business here, here sustainable development here Sustainable Development Goals (SDGs, UN) here, here, here, here, here, here, here sustainable investing see ESG (environmental, social, governance) investing Sustainable Investment Forum Europe (Eurosif) here Sustainalytics here Swan, Roy here Tae-won, Chey here Talian here Tanzania here, here, here tariffs here, here taxation here, here, here, here Tazreen Fashion here, here technology sector here, here, here Telecom Italia (TI) here telecommunications industry here, here, here, here, here, here Telekomunikacja Polska (TPSA) here tendering process here, here Tesla Inc here, here theft here, here thematic investing here, here Third Point (hedge fund) here Thomson Reuters Corporate Responsibility indices here tracker funds here, here trade agreements here trade unions here traditional investing here, here tragedy of the commons here, here transfer pricing here transparency here, here, here, here, here Transparency International Corruption Perceptions Index (CPI) here, here, here, here, here, here, here, here Trump, President Donald here, here, here trust here Turkey here Turkish Airlines here UBS Group AG here, here UK Plastics Pact here under-invoicing here Unilever here Union Carbide here United Kingdom (UK) here, here, here, here, here United Nations (UN) Conference on the Human Environment (Stockholm, 1972) here Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) here Framework Convention on Climate Change (UNFCCC) here Our Common Future (Brundtland Report) here, here Principles of Responsible Investment (PRI) here, here, here, here Sustainable Development Goals (SDGs) here, here, here, here, here, here, here, here, here UN Women here United Nations Global Compact here United States of America (USA) here, here, here Clean Air Act (1970, USA) here Clean Water Act (1972, USA) here Employee Retirement Income Security Act (ERISA, USA) here Endangered Species Acts (1973, USA) here Environmental Protection Agency (USA) here Sudan Accountability and Divestment Act (2007, USA) here UPL Limited (India) here valuation here value creation of here, here, here and governance reform here loss of here see also returns Vanguard here, here Vavrek, Egon here Vietnam here Vivendi SA here Vodacom here, here Vodafone here, here, here Volkswagen here, here, here volunteering here, here wages here, here, here, here, here, here executive here, here, here gender pay gap here, here Walker, Darren here waste here, here, here, here, here, here wind power here Wolf, Martin here women here, here, here workers’ rights here, here, here, here, here, here Working Capital fund here working conditions here, here, here, here, here, here, here World Bank Ease of Doing Business (EDB) ranking here International Finance Corporation (IFC) here Xiaoping, Deng here Xi Li here Yin, Zhang here Zimbabwe here BLOOMSBURY BUSINESS Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA BLOOMSBURY, BLOOMSBURY BUSINESS and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © Mark Mobius, Carlos von Hardenberg & Greg Konieczny, 2019 Cover design: Eleanor Rose Cover image © Getty Images Mark Mobius, Carlos von Hardenberg & Greg Konieczny have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers For legal purposes the Acknowledgements on p xii constitute an extension of this copyright page Bloomsbury Publishing Plc does not have any control over, or responsibility for, any third-party websites referred to or in this book All internet addresses given in this book were correct at the time of going to press The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes A catalogue record for this book is available from the British Library A catalog record for this book is available from the Library of Congress ISBN: HB: ePDF: eBook: 978-1-4729-6265-2 978-1-4729-6267-6 978-1-4729-6266-9 Typeset by RefineCatch Limited, Bungay, Suffolk To find out more about our authors and books visit www.bloomsbury.com and sign up for our newsletters Bloomsbury is proud of its commitment to green business practices and environmentally-friendly publishing This book has been printed at an FSC-and ISO 14001-certified printer, on FSC and ECF (Elemental Chlorine-Free) paper produced in an ISO 14001-certified paper mill The inks used are vegetable-based, the coating is a water-based laminate coating and the packaging is recycled cardboard ... negative-screening approach accounted for the largest share in Europe ESG integration was the lead category in the USA, Canada, Australia/New Zealand and Asia, excluding Japan In Japan, corporate... South East Asia He lived and worked in Poland before settling in Istanbul, Turkey, for 10 years Carlos has spent a great deal of his time travelling in Asia, Latin America, Africa and Eastern... Public awareness of and concern about man-made environmental degradation, and their expressions in national and international regulations, agreements and commitments, such as the Paris Accord, create