Moira Forbes: What does sustainable investing look like in your day-to-day practice as you identify opportunities on a global scale and translate those opportunities in the marketplace?
Heidi Heikenfeld: Socially responsible investing is something that’s fundamentally important to me, and one of the ways that we’re changing lives in emerging markets (EM). I run a small- and mid-cap emerging market strategy, and I try to do it in a socially responsible way. When I think about environmental, social, and governance factors that make up the ESG acronym, the governance component is easy, because it’s what portfolio managers are responsible for doing every day as part of the research process.
On the environmental side, I recognise its importance, but I’ve struggled to find ways to generate returns for investors – which is my priority – and also help the environment. Where I’ve landed on this issue is that I try to do no harm. One way I do that is by avoiding commodities. Within emerging markets, that’s something that has return implications because there are times when EM performance is driven by commodity price increases. That means I have to work harder to generate returns outside of commodities, but I believe it’s the right thing to do.
What I’m most passionate about – and the area where I think we can really make a difference – is in the social component of ESG. The first thing here – and it’s especially prevalent in emerging markets – is to avoid socially exploitive companies like those that rely on labour arbitrage models. If you’re only in a country because the labour is cheap, then companies are incentivised to keep wages very low, which exploits workers.
There are areas, however, where you can invest in companies that are very profitable and making a positive social difference. In healthcare, for example, there are companies that are improving access to medical care for local populations by creating cheaper replicas of therapies that treat diseases like breast cancer. For some women in these markets, this is the first time they’ve had access to cutting-edge therapies that treat life-threatening diseases.
Forbes: What are the changes you see in the investment community and at OppenheimerFunds around sustainable investing? How is the availability of data on ESG factors making a difference?
Sharon French: Many factors are driving the growth of ESG at OppenheimerFunds and in the investment community more broadly. There have been global policy shifts, like the Paris Climate Accord, which have helped move the ball forward in a regulatory sense. Meanwhile, shifting demographics have created more demand for ESG from clients – women and Millennials in particular have expressed interest in it and are asking their financial advisors to include a sustainability lens in the portfolio.
When we approached ESG at OppenheimerFunds, it was because clients were asking for it. In the last few years, the firm became a signatory of the UN Principles for Responsible Investment, joined the US Sustainable Investment Forum, and launched several specific sustainable investment products. We also have many ESG-aware portfolio managers who consider ESG factors to varying degrees during the research process.
Data on ESG factors has become widely available in recent years, and I believe that digging deeper into ESG issues is our shared responsibility as investors. It’s not just about the feel-good elements, it’s about risk management.
Forbes: How do you translate the work you do within the context of the local communities where these companies operate? There are different types of risks in emerging markets than there are when you’re investing in developed markets.
Heikenfeld: I spend 30%-45% of my time on the ground in emerging markets, in part because there are complexities there that you may not encounter in developed markets. We invest in 30 different countries, and I have to be on the ground in each one to understand each business within its local context. Particularly when it comes to smaller companies, there’s no way you can do this work from 30,000 feet.
For example, take microfinance, which provides loans and other banking services to small businesses that have traditionally been excluded from formal financial services. Some microfinance companies are empowering, but others are exploitive. You have to do your due diligence on each of them, on the ground in their local markets, to understand how the money is being used. Is it being lent to affinity groups of women who are funding their businesses and receiving related education, or is it being used to exploit local communities?
Another area of complexity is genetically modified crops. In the United States and Europe, they’re frowned upon. In countries like India, where there are food shortages and a real problem of farmer suicide when yields are bad, they need genetically modified crops. I’m proud to own a company that’s tackling this issue.
Forbes: Where are you seeing the highest demand for sustainable investing – and is that evolving?
French: When you look at demand for ESG, it’s much higher in Europe today, and much of that demand comes from institutions. Corporations in Europe are more focused on societal good – that’s different than how we think about corporations in the United States, but that’s starting to change.
We’re in the process of talking to our clients and financial advisors about what’s behind this disparity. Is it lingering scepticism about performance? Do advisors and investors understand the risk management benefits? We know that there are mixed messages in the marketplace and confusion around the lack of uniformity in nomenclature. For sustainable investing to take off in the U.S. retail market, we need to address these issues and provide more education to the investing public.
Forbes: You’re facing a complex risk environment, a changing regulatory backdrop, volatile markets, and a labour-intensive, grassroots research process. How do you do ESG investing at scale?
Heikenfeld: Because I’m a small- and mid-cap manager, I have access to a large universe of 5,000 companies. That means I can invest at scale without needing to be in areas like commodities or industries that exploit workers. I look for highly profitable businesses and those with intellectual property. Healthcare, technology, and consumer-oriented companies make up 65%-75% of my portfolio. These sectors generally have higher margins and are supportive of high wage growth.
In the end, to make a positive difference in emerging markets, you need to bring in investors who aren’t focused on ESG. You need that volume of assets to effect change. But you can say to these investors, you have two options with similar returns, but one of them is a fund you can feel good about. I think people are more likely to choose that option.