Material ESG in Frontier Markets – Survey Evidence
with Burton Flynn and Rabi Nasir
Are material ESG factors priced in frontier markets? We asked this question in our research and the answer, to be honest, is that we’re not sure. We launched a two-year investigation, and our results were inconclusive.
So what did we do? We collected unique ESG survey data from 850 companies in frontier markets via Terra Nova Capital, the advisor to the Evli Emerging Frontier Fund. Not only did we gather material ESG data as defined by SASB*, but also the extent of corporate investments that they made in these sustainability categories**. We wanted to understand whether the market was pricing genuine long-run ESG aspirations of these firms. What also made our study unique is that the majority of the companies we surveyed were not covered by traditional ESG providers. Lastly, because of our methodology, we were also able to measure material and non-material investments made by companies to examine whether the market was pricing greenwashing.
In conclusion, we found no consistent patterns. We did not see firms’ material nor non-material ESG investments being priced by the market, measured by Tobin’s Q or any other measure. Even across subsamples, we found no consistent patterns. To us, it felt as is firms were on the move, but investors didn’t know or didn’t care. We couldn’t tell.
Assuming we were able to measure material ESG investments to a relatively fair degree (there are always opportunities for improvement), our new questions became the following: 1) If material ESG factors are not yet priced in frontier markets due to information asymmetries, are there a long-run alpha opportunities up for grabs (our study could not examine this yet, but it can be tested later)? or 2) if material ESG factors are priced in (to some degree) but are deemed financially less relevant compared to other pressures, what does that mean for changing firm behaviour in these markets?
Overall, we’re still confused, but we remain motivated to continue solving these questions. We hope sharing our experimental results might be of interest to others dealing with the same problems. If anyone is interested in studying the data in search of further insights, please let us know.
Presentation and findings here: PDF
*The ESG data collected was based on the SASB Materiality Map. The map defines 77 industries and 26 general sustainability issues. We manually mapped and categorized the descriptive ESG investment responses of each company according to the SASB standards. We also asked companies to self-identify the industries they were in.
**On average, we found that companies were more likely to be investing in material categories (25%) as opposed to immaterial categories (18%)