By Thede Rüst, head of emerging markets debt at Nordea Asset Management

Investor attitudes towards ESG have radically evolved in recent years, with active ownership – the use of engagement and voting to influence companies – now overwhelmingly recognised as a force for good. In addition to fostering progress, constructive dialogue with corporates is increasingly being accepted as a vital element of long-term value creation within both equity and bond markets.

However, as the majority of fixed income assets are issued by countries and government-related agencies, there still remains heavy scepticism surrounding the ability of ESG-aligned asset managers to positively influence sovereign entities – particularly in emerging markets.

There will obviously be instances where engagement efforts are futile, as highlighted by Russia, which was formerly a considerable component of emerging market bond indices. In such cases, there is no substitute for a robust ESG research framework, where human rights and governance factors feature prominently. In the case of Russia, due to mounting evidence of deteriorating governance standards, we put a freeze on all purchases of the country’s government bonds in 2020, before divesting all remaining assets in January 2022.

Encouraging interactions in Brazil

Even though engaging with governments can often be arduous, especially in emerging markets, it is still possible to enact positive change. For example, noting the negative financial materiality of continued rainforest destruction, we at Nordea decided in 2019 to no longer buy Brazilian government bonds for any of our internally managed emerging market debt strategies.

Despite taking this course of action, true responsible investors do not simply divest and disappear. In 2020, Nordea became a founding and advisory member of the Investors Policy Dialogue on Deforestation (IPDD), a collaborative engagement aimed at initiating and coordinating a public policy dialogue on halting deforestation. The Brazil working group was the first formal country workstream of the IPDD, which has since been extended to Indonesia.

The Brazilian government has not done enough yet to make us change our investment stance – but we are encouraged by recent progress. For example, the wide-ranging regulations on ESG announced by the central bank late last year are a good step forward. This includes the requirement that all environmental, social and climate impact is taken into consideration for all financial services and products. It is also preparing to require the country’s banks to account for potential losses from climate change-related phenomena – such as droughts, floods and forest fires.

Social factors also at forefront

While engagement on the climate crisis has accelerated in recent years, responsible investors have also made strong strides forward in positively influencing governments on the ‘S’ in ESG. For example, we continue to engage with Ghana’s government to discuss child labour in the country’s cocoa industry. In cocoa growing areas, 55% of children living in agricultural households were engaged in production and most were also exposed to hazardous work conditions.

Studies on the effectiveness of policy interventions against child labour have shown the most effective measures are not necessarily those designed specifically to prevent child labour. Efforts targeted at increasing school enrolment and retention have proved among the most effective, along with the construction of schools and the upgrading of other infrastructure. In fact, school enrolment and retention has increased across all levels of education in the country, with literacy rates rising from below 60% to almost 80% over the past two decades.

Despite government interventions, child labour remains widespread. In recent discussions with the government, we were informed the number of children involved in cocoa production in Ghana remained stable, even though cocoa production has grown by more than 50% in recent years. We will continue our dialogue with the authorities to highlight the importance of ongoing investment in education and infrastructure, particularly as the Covid-19 pandemic has halted educational progress in many parts of the developing world. In addition, more work needs to be done as cocoa farming expands into new geographical areas in the country, as the infrastructure needed to minimise the likelihood of child labour is less developed in more remote regions.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Investor Information Document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of your investment can go up and down, and you could lose some or all of your invested money. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/EP_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.