Home Breadcrumb caret Magazine Archives Breadcrumb caret Advisor's Edge Breadcrumb caret Planning and Advice Breadcrumb caret Practice How should a region’s political climate factor into investment decisions? We asked three experts By Maddie Johnson | May 9, 2022 | Last updated on May 9, 2022 3 min read iStock.com / hamzaturkkol This article appears in the May 2022 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online. Michela Gregory Director, ESG services, NEI Investments, Toronto An investor or asset manager taking a responsible approach to investing can’t overlook how geopolitical risks or a region’s political climate could affect ESG issues. Beyond trade compliance and whether the risks could result in a shift in international law or sanctions, you have to look at whether corporations are considering human rights risks, labour risks and any other affiliated ESG risks — and concerns that may evolve, or escalate, because of what is happening in a political context. If a company decides they can’t continue to operate in a way that upholds these standards, what does a responsible exit look like? Many times in these types of conversations, there is discussion around suspending and exiting operations, but that can also have implications. We’re engaging with companies operating in Russia to get a sense of their exposure and next steps, given the evolving circumstances in the region. Andrew Bradshaw Senior investment advisor, iA Private Wealth Inc., Antigonish, N.S. A lot of my ESG investing goes to what I understand. I am not steering my clients to emerging markets ESG holdings because I just don’t understand emerging markets as well. ESG ratings are simply harder to come by in certain emerging markets and I think that is due to a lack of transparency. It is harder to get the information you need to determine that ESG rating, and the information you do get is not always reliable. If I am going to invest outside of Canada, I typically rely on third-party managers to determine what regions to invest in. That way I am able to engage with the managers to understand what they are doing and how they are doing it, and to trust in their knowledge and expertise for those exposures. Russ Lazaruk Managing director and portfolio manager, NCP Capital Partners, Victoria There are a few different ways to approach this. With bonds, you need to look at how the political climate could affect the credit rating of the sovereign debt in the country or region you are investing in. There is a truism that most autocracies and dictatorships turn into kleptocracies, so a country with that kind of leadership is probably not a great place to invest from a fixed-income point of view. The problem with areas in political turmoil is that there often isn’t a good rule of law. Businesses need a lot of things to survive, so there are real risks if they are operating in an area with political instability. For me, there are some areas where the risks are too great and I wouldn’t invest, period. In ESG investing, I would argue that the most important factor to look at is governance, because if you don’t have governance, nothing else follows. For both companies and countries, if the entity is on the path of improvement, then you probably want to support it. Companies that have a low but improving ESG score will outperform because they are creating value by cleaning up their act. Maddie Johnson Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019. Save Stroke 1 Print Group 8 Share LI logo