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Defining Sustainability in Emerging Markets

30 April 2019   |  

To me, sustainability means having the ability to endure. It includes—but goes beyond—environmental, social and governance (ESG) considerations. More broadly, it entails businesses making the right strategic choices that bring continuity to their shareholders, employees, customers and the communities around them. Ultimately, my team invests in emerging markets because as a team of people who were born, educated and have spent large amounts of time in these countries, we want to direct capital to companies that can have a long-term positive impact on emerging markets’ people.

We believe companies manifest and embody sustainability in a variety of ways. 

On an individual company basis, sustainability arguably starts at the foundation—with the business model. We seek to avoid companies that are not structured to run sustainably over the long term. On the contrary, our team is committed to allocating capital in fundamentally sustainable ways—which means to businesses that are committed to both profits as well as progress. Profits obtained at the expense of progress are not are not sustainable in the long term.

For long-term investors, the earnings sustainability of companies in which they invest should be among their foremost considerations. We are interested primarily in companies capitalizing on the unique growth opportunities in emerging markets, developing a business model around those opportunities, and translating current growth into sustainable earnings over time. We are not seeking growth solely for its own sake today—rather we are intently focused on identifying growth that can be sustained well into the future.

Another critical quality we look for in the businesses we invest in is a sustainable competitive advantage. Because we know the environment in which these companies operate is constantly evolving, we look for companies that have a sustainable competitive advantage in markets where they compete. Good and bad times will necessarily come and go, and we know that in the face of a crisis, the share prices of most stocks will fall. But we believe sustainable competitive advantages are key to a company’s ability to survive in times of crisis—because while their competitive advantage might be weakened by the crisis, it is less likely to be destroyed altogether if it has staying power.

Environmental, social and governance considerations are natural given our focus on sustainability, and we believe companies engaged in harmful activities are unlikely to successfully drive long-term earnings growth. While these factors certainly play a role in our decision-making process, our approach to sustainability is much broader and deeper than solely ESG.

For us, sustainability is about the future and implies success over time. Therefore, we seek companies we believe capable of achieving sustainability through time—that are showing signs of successfully growing and evolving toward it—rather than just identifying companies that have already been successful. Our focus on the future is a primary reason fundamental research and meeting with people face to face are important to our process. In our experience, third-party sustainability or ESG screens or ratings tend to be backward-looking—whereas investing and progress are about the future. We believe negative ESG screens or exclusion lists, as well as third-party ESG or sustainability scores run the risk of missing out on companies capable of shaping a better future for emerging markets countries and their populations.

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