Asia and emerging markets - can you invest responsibly?

There are lots of great reasons to invest in Asia and emerging markets.

Many are home to young, increasingly wealthy populations and an expanding workforce that's expected to underpin economic growth for decades to come.

There's plenty of diversification on offer too. Some emerging markets are rich in commodities and natural resources, some rely on exporting goods to Western economies, and others are technological leaders. We think an investment in Asia and emerging markets can offer excellent growth potential over the long term. But it's higher-risk, so should usually only form a small part of a well-diversified portfolio.

A great opportunity – but still room for improvement

Asia and emerging markets present a unique challenge for responsible investors. Many have less stringent regulation around environmental, social and governance (ESG) issues – including human rights and working conditions. Getting these issues wrong can have deadly consequences.

In April 2013, structural failure caused the collapse of the Rana Plaza, an eight storey commercial building in Dhaka, Bangladesh. It killed 1134 people, and injured around 2500. It’s considered the deadliest structural failure accident in modern history.

Managers ordered workers to return to the building, despite warnings to avoid using it after cracks appeared, because they were under pressure to complete orders on time. Some have argued that high demand for fast fashion and low-cost clothing meant there was minimal oversight of clothing brands. It’s also suggested that effective trade unions could have responded to the pressure from management.

The tragedy drew attention to health and safety failures by the Bangladesh government and companies who make their products in the country.

What can investors do?

Lots of annual reports produced by companies in emerging markets tend to contain less information than those in developed countries. That can make it tricky to assess how seriously a company is taking ESG issues.

ESG funds consider the environmental and social impacts of a business, as well as the way it's governed. They can be a good way to make sure the companies you invest in are acting responsibly. Fund managers generally meet with companies they invest in regularly to glean insights not available through the annual report.

This article is not personal advice. All investments will fall as well as rise in value, so you could get back less than you invest. If you’re not sure an investment is right for you, seek advice.

Fund in focus: FSSA Asia Focus

The FSSA Asia Focus fund invests across Asia and emerging markets, from China and India to Singapore and South Korea. Fund manager Martin Lau and his team see stewardship as an essential ingredient to long term investment success. When they invest in a business, they want to make sure it's run in a way that'll benefit all shareholders, and ESG issues form a core part of this.

They don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer-term, more sustainable growth. They don’t like businesses that exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment around it.

The team also engages closely with company management. It helps them make sure management remain on track with sustainability issues, or encourage them to change their behaviour if needed. If they don't think a business meets their standards, or is doing enough to address a particular problem, then they won't invest.

Overall the team believes that, as investors, we cannot ignore business' impact on society and the environment – and good governance is the foundation on which great companies can be built.

Martin Lau and his team are some of the most experienced investors in Asian companies. They've built an exceptional track record and shown an ability to invest in companies with great long-term prospects. We expect the fund to do well over the long run, although there are no guarantees, past performance isn’t a guide to the future.

Past performance is not a guide to the future. Source: Lipper IM to 30/09/2020.

Find out more about FSSA Asia Focus, including charges

FSSA Asia Focus Key Investor Information

How to build a responsible investment portfolio