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As emerging markets based companies seek to make their mark on the global stage, environmental, social and governance (ESG) policies have become priorities. Progress is still patchy, especially farther down the corporate scale, but at least the issues are becoming fixtures on their corporate agendas.

Gary Potter, co- head of multi-manager services for the UK at Credit Suisse Asset Management, notes: "The majority of emerging markets countries are coming of age and becoming more integrated into the world financial system.

"For example, over the past five years, we have seen more emerging companies list on world stock markets and doing business internationally. These things do not come without a price and companies have had to clean up their act if they wanted to attract investors, meet the listing requirements of developed stock exchanges and raise capital."

According to Credit Suisse research, 29 of the 53 major Chinese companies with a market capitalisation of more than $3bn (e2.4bn) are listed only on overseas markets, including Hong Kong. Meanwhile, the London Stock Exchange, a favourite with Russian companies, is bracing itself for a wave of initial public offerings, including JSC Uralkali, a chemical giant, OAO TMK, a supplier of steel pipes to the oil and gas industry and Severstal, the country's second largest steel maker.

Uralkali's bid to complete a $908m to $1.1bn IPO by selling 442.7m local shares and London-listed GDRs is the most significant Russian deal since Rosneft's $10.4bn IPO in July.

Emerging markets companies have also come under pressure from multinational stalwarts such as Shell and Nike who have faced their own barrage of criticism for shoddy working practices in the third world.

Bruno Erbiste, a São Paulo based co-portfolio manager of ABN Amro's Brazil Equity Fund, a SRI vehicle that targets shares in emerging markets, adds, "The companies listed in the stock exchanges are the largest companies in the region, engaged in global trade, selling their products and services to clients in developed markets.

"These companies already behave well, as they face pressure from their clients in developed markets. Companies that are not dealing with ESG issues tend to be the small and middle ones, which are not in the radar screen of investors and do not participate in global trade."

As David Gait, fund manager of First State Asia Pacific Sustainability Fund, point out though, that companies across the spectrum in emerging markets have realised that incorporating best ESG practices will not only attract international investors but also give them a competitive advantage in winning business from global companies. "A retailer, for example, such as Gap, will not do business with companies that have poor labour practices."

In the long term, Gait believes that companies who do not change and embrace industry best practice will become "sustainability laggards" in their industry. "Those companies who are reluctant to change will not only miss out on new market opportunities, but also risk serious long term damage to their financial health."

There is no doubt that strides are being made but the majority of emerging markets companies still have a long way to go before they can truly fly the ESG banner. This is why investors following a socially responsible investing path are advised to be realistic and tread carefully.

In fact, overall, the number of emerging market companies achieving top scores for their ESG performance is few and far between.

A study published this past September by GovernanceMetrics International, a US based corporate governance, research and ratings agency, revealed only two firms - Taiwan Semiconductor Manufacturing of Taiwan and Gold Fields in South Africa - made the grade. Both achieved an impressive 7.5 out of a total score of 10.

The performance scores for the emerging markets group as a whole was disappointing. The 321 companies from 25 countries, who were included in the report for the first time, only managed a 4.3, which is far below the 6.5 to 7 they would need to obtain to be considered an average performer, according to Gavin Anderson chief executive officer of GMI.

Anderson adds: "Investors have long perceived that emerging market companies have relatively poor governance attributes and our research shows that for the most part the perception is reality.

"Although progress has been made and things are better than they were 10 to 15 years ago, it is also important to remember that things have not stood still in the west. Developed countries have also been continually improving their ESG standards and so the gap is the same with the emerging markets."

South Africa stands apart from its emerging market peers, mainly thanks to the King Report on Corporate Governance in 2002. The report, which was similar to the Cadbury Report in the UK, has had a significant impact on the way companies conduct business," according to Anderson.

South Africa not only led the way on the GMI emerging market charts but it also ranked eighth on the global league table with a noteworthy score of 6.26. This was higher than Germany, Singapore, Italy, Switzerland, Norway, Sweden, Spain, France, Japan and South Korea Overall, the 3,468 companies in developed markets scored an average rating of 6.47 while 38 firms based in Australia, Canada, the UK and the US were rewarded with top marks of 10.

GMI rated companies according to 400 factors including board accountability, disclosure, executive compensation, shareholder rights and ownership base. When breaking down the numbers further according to corporate governance standards, the study revealed that only 35% of emerging market companies had a majority of independent directors compared with 75% in industrialised markets. Only about 29% of audit committees in emerging markets companies are composed solely of independent directors compared to 70% in the developed world while only 50% have a compensation committee versus 86%.

However, analysts are optimistic that the reforms being implemented in many countries will bear fruit in the future. The tide is already slowly turning in Brazil which was known for having one of the worst records for its treatment of minority shareholders. Recent moves by stock regulators to uphold their rights, as well as continued moves toward greater levels of transparency and corporate governance are attracting more investors into Brazilian shares.

The catalyst was the Novo Mercado, launched in 2002, which submits companies to rigorous listing standards including having to issue voting shares, offering 100% tag-along rights and maintaining a free float of at least 25% of shares. It has now become the favourite home of companies who want to make their stock market debut. About 17 of the 26 initial, primary or secondary share offerings so far in 2006 were listed on the Novo Mercado - up from 10 out of 19 share offerings in 2005.

Erbiste says: "Companies on the Novo Mercado market have sent a strong signal to the market. It says that a stronger corporate governance policy means a better managed company and that their rights as investors will be fully respected."

Niall Paul, head of equities, emerging markets for Morley Fund Management, adds: "Brazil is a perfect example of a country that can turn itself around. It had a poor record in protecting minority shareholders rights which came to a head during the consolidation of the telecommunication industry over the past two years.

"However, the Novo Mercado has made a big difference. Investors realise that these companies are worth more and as a result, their shares are trading at a premium."

As for China, although it will not happen overnight, the government has been working hard to raise the bar since its introduction into the World Trade Organisation. Last year, saw the removal of a $250bn overhang of non-tradable shares held by the state as well as moves to improve corporate management and information disclosure. More recently, Chinese authorities have cracked down on a number of high profile corruption scandals including one involving Shanghai Electric Group, the country's largest power equipment manufacturer and a Hong Kong-listed company. The chairman, Wang Chengming was recently replaced as chairman.

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