Basak Yeltekin

Globe WorldWatch

Reflections on TT’s Sustainable EM Strategy at its 1-year anniversary


The TT Sustainable EM strategy recently celebrated its 1-year anniversary, having successfully generated alpha in challenging market conditions. In this piece we reflect on the strategy’s first year and drill down further into how it beat its benchmark. 

At the beginning of October 2022, we launched a sustainable version of our existing EM strategy. Our goal was to create something different to the peer group, and ensure that both the spirit and letter of the regulation was captured.

The strategy’s main tenets were to:

  • Actively target the UN Sustainable Development Goals (SDGs) using a proprietary scoring framework, and invest at least 80% of the strategy’s capital in companies that promote the SDGs through their operations and/or products.
  • Exclude companies that derive >10% of revenues from: fossil fuels and related sectors, tobacco, cannabis, alcohol spirits, gambling, weapons, and adult entertainment.
  • Ensure that every investee company is subject to a UN Global Compact violations filter.

Our core view was that the SDGs are universally relevant, but they matter even more in an Emerging Markets context. A study carried out for the UK government by Intellidex sought to identify the major impediments to capital flows into Emerging Markets and found that one of the biggest hurdles is the rise of ESG strategies because of the emphasis that these strategies put on avoiding risk rather than achieving positive impact. This can result in investors reducing their allocation to Emerging Markets because of concerns about social and governance flaws, or a simple lack of data, when Emerging Markets are actually in greater need of capital flows to develop sustainably (1. FT Moral Money, “How ESG strategies hurt Emerging Markets”, 17 June 2022).  

We believe that this approach is wrong and creates inefficiencies, rendering Emerging Markets even more attractive for ESG investing. The companies that are likely to be the structural winners are those that invest in people and minimise their impact on the environment, whilst contributing to economic growth.

One year of running this strategy alongside our core EM offering has proven to us that ESG does not come at the expense of performance. In fact, it can help to enhance returns. Over the past 12 months, TT’s Sustainable EM strategy outperformed its ex-fossil fuel benchmark by +1.9%, and the broader MSCI EM index by +1.4%.

When we look at the key contributors to positive returns, our top 3 winners all had important ESG catalysts. The biggest contributor to our return over the past year was Qifu Technology, a Chinese technology services provider to financial institutions and SMEs. Qifu is a clear example of transformative governance improvements. The company had a listing on the US NASDAQ exchange, but the shares had come under pressure as geopolitical tensions increased. Following our engagement around governance and listing, the company’s chairman chose to disband the dual class voting structure to become eligible for a Hong Kong listing. The company listed on the Hong Kong Stock Exchange in November. Under its dual class voting structure, the company’s share capital was comprised of class A shares and class B shares, with each class B share entitled to 20 votes, while each class A share was entitled to one vote. Immediately following the completion of the listing, the company delisted all class B shares.

Our second top contributor AngloGold Ashanti is a South African gold miner and one of the highest scoring companies in our proprietary SDG framework (99th percentile of MSCI EM). AngloGold was our preferred investment to express our positive view on gold. We also felt AngloGold was superior from an ESG perspective to some other potential investments in the sector, which had severe and ongoing cases of environmental degradation due to practices such as depositing tailings into nearby rivers. We engaged with the company on their tailings dam safety and use of water resources. In September 2023, MSCI also upgraded AngloGold’s ESG rating from 'BBB' to an ‘A’ due to improved safety performance and environmental management initiatives.

The third biggest contributor to our 1-year performance was Axis Bank, India’s third largest private sector bank. In terms of its operational alignment with the UN SDGs, the bank scored in the 85th percentile of MSCI EM. Furthermore, we felt there was strong alignment with the SDGs in terms of the bank’s focus on SME banking, with this segment (along with small- and mid-size corporates) reaching 20% of the loan book, 6% higher than 3 years ago (BofA Securities research, July 2023).  We engaged with Axis Bank and requested an update from the firm on female representation in management. Axis Bank said that its signature ‘Pause for Bias’ sessions have allowed uninhibited conversations about the representation of genders.  The firm’s gender diversity across management continues to improve – gender diversity at the management level was 8.8% at the end of March 2022, up from 8.0% in March 2021, while female representation at the workforce level has consistently improved to 26%. The bank aims to reach 30% female representation in its workforce by FY27. In terms of its business strategy, Axis had 2.2 million female borrowers under retail microfinance. We believe that the bank’s efforts to improve financial access to women and to promote women in its own management will also support its business strategy and loan growth.

As these three examples illustrate, we have created substantial value in this strategy thanks to ESG engagement and improvements. 

Looking ahead

Our prediction at the inception of our Sustainable Emerging Markets strategy was that our disciplined framework would produce long-term capital growth for our investors, and alignment with the SDGs would present a long growth runway for the companies we invest in, enabling them to keep their social licence to operate. In our view, the discipline that has helped us outperform in a difficult market environment will help bolster our returns in the future, while our active engagement with investee companies – a cornerstone of the strategy – will continue to help us harness the alpha opportunity stemming from improvements in ESG disclosure and practices. 

Important information: This document is issued by TT International Asset Management Ltd (“TT”), authorised and regulated in the United Kingdom by the Financial Conduct Authority. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The circulation of this document is restricted to professional investors as defined in the legislation of the jurisdiction where this information is received.  No representation is made as to the accuracy or completeness of any information contained herein, and the recipient accepts all risk in relying on this information for any purpose whatsoever. Without prejudice to the foregoing, any views expressed herein are the opinions of TT as of the date on which this document has been prepared and are subject to change at any time without notice. TT does not undertake to update this information. Any forward-looking statements herein are inherently subject to material business, economic and competitive risks and uncertainties, many of which are beyond TT’s control and are subject to change. The information herein does not constitute an offer of shares or units in any fund, and it is not an offer to, or solicitation of, any potential clients or investors for the provision by TT of investment management, advisory or any other comparable or related services. No statement in this document is or should be construed as investment, legal, or tax advice, nor is any statement an offer to sell, or a solicitation of an offer to buy, any security or other instrument, or an offer to arrange any transaction, or to enter into legal relations. This document expresses no views as to the suitability of the investments described herein to the individual circumstances of any recipient. Any person considering any investment should consult the offering documentation if and when is made available. Investments carries with it a high degree of risk. Past performance is not necessarily indicative of future results and investors may not retrieve their original investment. 

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