Responsible investing: Challenges and best practices in emerging markets

Responsible investing: Challenges and best practices in emerging markets

Charlotte Wales Blog, Private Equity

Emerging markets are highly unregulated. While this may provide opportunities for the less scrupulous elements of business, in the majority of cases burning bridges through smash and grab techniques will leave a lasting stain on the reputation of the organisation ensuring any future opportunities are firmly out of reach.

Although regulation may be limited, the same behaviours that are legally enforced in the west are often socially enforced in emerging markets, with an expectation that both companies and individuals will operate to a strict social code. Failure to do so will result in a company being ostracised both at the personal and corporate level. The result is that key contacts required for the successful operation of a business in an emerging market are either benign and unsupportive at best, or maliciously detrimental at worst.

Local support at every level is essential to the strong operational performance of a company, from labour quality and attendance through to senior management connections, relationships with government officials, interdependencies in supply markets and the protection or potential destruction of company assets. External and foreign investors can, depending on the region, be viewed extremely warily, limiting support and slowing profit generation.

In regions and countries that have recently experienced armed conflict, where the investor company’s country of origin participated on either side of the conflict, there often remains strong negative sentiment among the local populace towards all individuals of the same origin. This can potentially turn both the market and workforce vehemently against investors, thereby making it difficult if not impossible to ever return for a second opportunity. Strong social programmes should therefore be considered as a key element of responsible investing running in parallel to business development. It is far easier to facilitate a smooth introduction, gain trust and build successful relationships when there is an evidenced commitment to supporting local growth. Relatively cost effective solutions can be implemented from language and systems training, social events through to large-scale infrastructure support and rehabilitation programmes.

When operating in regions following recent conflicts, there are a number of operational risks that need to be considered, yet are not always easily identified. Where reputations have been damaged or there are negative associations following conflict, it is critical that such risks are explored in detail and the extent of the potential impact thoroughly assessed. For example, local employees may be at risk of personal threat and violent attack simply for accepting employment with the company or their route to work may involve travelling through areas that contain unexploded devices, or they may use unsafe modes of transport. All these risks can lead to the loss of life impacting not only the families and communities of the individual, but also damaging a company’s reputation, both locally and internationally, and reducing its ability to adequately resource to deliver or build essential working relationships within the community.

Best practice tips to consider:

  • Local and strategic social and economic programmes to support change and development.
  • Low-cost solutions to risk mitigation. For example, in Basra, Iraq, a free transport was introduced for the local workforce to mitigate risks employees could face travelling to work in their own vehicles).
  • Low-cost solutions to providing local support for growth and development. For example in Basra and Angola, free English lessons were introduced, and in Angola, free computer and internet access was made available with training on how to compose a procurement bid.
  • Understand the competencies, capabilities and amenities of the local workforce and market. For example, provide hard copy submission routes for a local market with no access to reliable electricity or Internet. Expect delays in every process and plan for extensions, as they will happen.
  • Understand the culture; especially post conflict where often the community can have a blasé attitude to the preservation of life.

This article by Charlotte Wales was first published in PEI’s book Value Creation Through Responsible Investment.