A review of ESG practices in large emerging market companies

This paper analyses the state of corporate responsibility in emerging markets, by studying a sample of 40 leading companies in ten emerging markets. It discusses how the largest corporations in developing economic markets are addressing environmental, social and governance (ESG) issues.

The assessment methodology is based on indicators of key ESG criteria. The indicators include board practice, bribery, human rights, labour standards in the supply chain, health and safety, environment, climate change and biodiversity.The paper finds:

• companies scored much better in environmental areas than in social or governance areas, with some reaching grades equal to those of developed country environmental leaders in environmental performance and systems
• companies in higher impact sectors, including those in the resources sectors, performed better on issues such as health and safety and environment, where the risks are typically greater – climate change disclosure however remains an area where emerging market companies lag in establishing good reporting practices
• public disclosure of key governance issues was high, including director remuneration (33 out of 40 companies) and the separation of the roles of chair and CEO (28 out of 40 companies)
• the selected South African and Brazilian companies stood out overall as consistently having the highest assessments among the companies sampled - these countries also developed some of the first responsible investment indices in emerging markets, acknowledging investor interest with ESG performance

Overall, the majority of the companies show evidence of addressing at least some ESG issues in their public disclosures, but the performance varies across countries.The evaluated companies have established better environmental policies relative to social and governance systems.The paper suggests that these observations can present opportunities as well as risks for investors to consider in emerging markets.

The paper makes several recommendations, including:

• engaging to improve company performance - engagement with other key stakeholders such as governments or affected communities may enable investors to better identify the issues and achieve improvements in company performance; investors could also be more vocal in requiring minimum ESG disclosure standards from emerging market legislators and exchanges
• seeking better corporate disclosure - there is significant scope for improvements in both the levels of disclosure and the quality and consistency of information provided; investors need to make clear to emerging market companies that ESG data is increasingly important to them and that improved levels of disclosure help them understand corporate risk exposure and performance on these issues