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Dragon Capital calls for greater ESG focus in frontier and emerging markets

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A lack of awareness of ESG among local businesses and companies in frontier and emerging markets is creating challenges for sustainable investors in these regions, according to Vietnam investment manager Dragon Capital.

Dragon Capital, which manages the largest and oldest Vietnam-focused fund, Vietnam Enterprise Investments Limited (VEIL), says there must be more engagement with companies in the frontier and emerging markets if investors are to achieve their ESG investment goals.  

The investment manager writes that it is leading by example with a proactive corporate governance approach, rather than simply utilising voting powers. VEIL actively engages, leveraging its expertise and resources to drive positive change and unlock value for shareholders.

For example, the firm writes, before the AGM season, VEIL works closely with their investees, presenting them with innovative options to close the gap with international best practices and, most importantly, align shareholders’ benefits. Many retail companies in Vietnam have implemented Employee Stock Ownership Plans (ESOPs). While this scheme has its advantages, the fund recognised potential drawbacks and anticipated future accounting policy changes that could impact business results. 

To address these concerns, VEIL conducted in-depth case studies on stock options, presented to their investees its applications, impact, and allocation policies to ensure shareholders were not excessively diluted, and value creators and key personnel in the firm received appropriate rewards. As a result, their investees adjusted their ESOP plans, minimising dilution by incorporating operational and financial targets, and started experimenting with stock option mechanics.

In addition, Vietnamese companies predominantly distribute profits through cash payments, disregarding the global practice of buying back treasury shares. Recognising the potential benefits, VEIL analysed this approach and introduced it to three of their investees having the strongest recurring cash flow. One company embraced the proposal, including it in their AGM as an open option, while the others are studying the impact of share cancellations and foreign ownership limits from the annual buyback. When it comes to capital raising for investees or their subsidiaries, VEIL shares its vast experience on deal structures, appropriate valuations, and the selection of consulting partners to ensure adherence to best practices throughout the process.

Dien Vu, Portfolio Manager of VEIL, says: “ESG practices face significant challenges in Vietnam, including a lack of awareness among local businesses and companies, and weak enforcement. Advocacy is essential for responsible investors to promote sustainability and accountability, and we have demonstrated our commitment to engagement this season to ensure our investee companies’ proposals align with shareholder interests.” 

Dien Vu continues: “VEIL actively encourages its investee companies to adopt sustainable practices through engagement and advocacy, using its influence as an investor to promote positive change. VEIL also seeks potential investment opportunities in companies that demonstrate strong financial results and good ESG ethics, which align with VEIL’s investment objectives.”

Summary of Key VEIL ESG Metrics 

As a long-term investor committed to sustainability, VEIL has integrated ESG considerations throughout its investment process. It screens and assesses the ESG performance of all investee companies, except for those in the financial sector. Greenhouse gas emissions of VEIL’s portfolio are presented using the TCFD’s recommended metric of weighted average carbon intensity (“WACI”), in comparison to local benchmarks. 

At VEIL, responsible investment is essential for its stakeholders and the greater good of society. As such, VEIL’s investment strategy emphasises ESG factors in its investment decisions and integrates them throughout its investment process to optimise risk-adjusted performance. VEIL recognises the interconnectedness of climate change, greenhouse gas emissions, and biodiversity loss, and are committed to addressing these global challenges as active, long-term investors. VEIL also encourages their investee companies to improve sustainability practices and engage with policymakers to promote positive change. Together, VEIL strives to create sustainable value for all stakeholders and contribute to a better future for its communities and the environment.

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