Emerging markets disconnected on ESG

GPs investing in emerging economies face continued resistance from local entrepreneurs.  

Dealing with cultural differences and varying standards of governance due to political and economic development is the most challenging thing when trying to implement environmental, social and governance policies in emerging market businesses, delegates heard at a Private Equity International event in London yesterday.

“There is significant growth coming from emerging markets today, and we know that of the GDP expansion expected globally between now and 2020, something like 75 percent of that is actually coming from emerging markets,” moderator Geetha Thamaratnam, director at the Abraaj Group, began.

Panellists raised the question over whether it was fair for developed economies to impose ESG principles, for example carbon emission reduction, on countries that are still developing and industrialising.

Moreover, on a smaller scale, companies often have so many everyday practicalities to deal with, implementing ESG is seen as more of a luxury, than a basic requirement.

“What they experience on the ground are practical everyday realities where ESG is a special thing they would focus on if they [didn’t have] to deal with shifting labor pools [or] access to capital being fickle [for example],” Darren Massara, managing partner at NewQuest Capital Partners in Hong Kong, said on the panel.

“When you look at these very practical realities that they have, such as how am I going to deal with my employee pool that wants a 20 percent wages increase a year and all sorts of improvements in working conditions, but we also need additional capital and don’t know how we’re going to source products, a lot of this tends to be the main focus on their mind. Longer-term operating efficiencies [such as ESG] tend to be at the back of their mind.”

Ed Norton, TPG senior advisor on ESG, added, “The cultural differences and the issues of different standards created by different periods of political, economic and legal development, [are], in emerging markets – particularly in China, but also Indonesia and Vietnam – very difficult issues.”  

Norton says that even internally, TPG executives from across the globe differ in their opinions over ESG in emerging markets, although would not provide details on specific conflicts.

He adds that some investors, in particular the International Finance Corporation, have been “a blessing” in terms of ensuring the firm adheres to strict ESG principles.

ApInvest Partners global head of fund of funds, Maarten Vervoort, offered an LP perspective, telling delegates how LPs can get across the importance of ESG in certain emerging markets and emphasising the vast difference between the contexts Western versus Asian entrepreneurs understand and operate in.

“They have different regulation, different belief systems, different levels of development and wealth. Almost all dimensions have a massive difference. So in that sense – if you want to translate anything, you have to be very explicit, you have to be very elaborate, you have to explain to the last detail why they should be doing this. There shouldn’t be any room for interpretation.”