• Investors are looking to grow their portfolios in emerging markets.
  • They must take the time to understand the local business environment, culture, and evolving regulations.
  • Partnering with local investors can be mutually beneficial.

Over half of the world’s GDP growth since 2009 has come from emerging markets, with China and India accounting for over 40% of that growth. This trend is expected to continue, with emerging economies likely growing at 4-5% over the next couple of years, compared to only 1.5-2% for advanced economies.

While advanced economies still account for the majority of global market capitalization, we have seen a shift towards higher market capitalizations in emerging markets. Perhaps one of the most noteworthy examples is the Shenzhen Stock Exchange, which saw more than 170% growth from the end of 2009 to the end of 2018.

Exhibit 1. Shenzhen Stock Exchange, Market capitalization (USD millions), 2009-2018

Shenzhen Stock Exchange, Market capitalization (USD millions), 2009-2018
Image: World Federation of Exchanges (WFE) data

This rise of emerging markets is happening alongside other structural changes, namely, changing governance expectations and climate change. Yet these present a difficult challenge: how can institutional investors actively engage portfolio companies in markets where governance norms, legal frameworks, and responses to climate change may vary?

Investors are looking to grow their portfolios in emerging markets, but they are at a disadvantage when it comes to being active owners

Investors have historically been more aggressive in allocating capital domestically because they naturally understand the market better. Likewise, investors are at a disadvantage when investing in markets abroad and require a greater understanding of the complexity of engagement in those markets. As the rise of emerging markets continues, active ownership in these markets will become even more critical.

Mark Machin, CEO of Canada Pension Plan Investment Board (CPPIB), wrote: “By 2025, we will invest up to a third of the fund in emerging markets,”. As a very long-term investor, emerging markets like China, India and Brazil are critical to CPPIB’s investment strategy.

To be successful active owners in these markets, investors must assess stewardship in the local context and take the time to understand the local business environment, culture, and evolving regulations. These differences serve to guide variances in stewardship and engagement activities.

Exhibit 2: How CPPIB customizes emerging market engagements

Image: Oliver Wyman, from discussions with CPPIB representatives

Applying investor stewardship in emerging markets

In recent years, we have seen increasing measures by institutional investors to apply investor stewardship in emerging markets. For example, Norway’s Government Pension Fund Global (GPFG), a $1 trillion sovereign wealth fund, has pulled out of more than 30 palm oil companies over the last several years due to concerns over deforestation risks. As another example, the Investment Association, an influential investor group representing UK-based firms with £7.7 trillion in assets under management, has recently singled out 94 listed companies for their inactivity regarding the number of women on their boards.

As part of our effort to encourage investor stewardship, the Forum has spoken to a number of institutional investors to get their views on active ownership in emerging markets, with the below findings.

Exhibit 3: Tips for investor engagement in Emerging Markets

Image: Oliver Wyman