Case Study: Integration of ESG Analysis in Emerging Market Equities

May 12th, 2019 | Jason Milne

When investing in Emerging Markets (EM), environmental, social and governance (ESG) factors can play a significant role in identifying growth opportunities, in addition to their more conventional role in helping to mitigate risk and enhance companies’ ability to deliver long-term, sustainable returns.

To illustrate how this works in practice, we asked the RBC Emerging Markets Equity (RBC EME) team to explain their approach to Marico Ltd., an Indian consumer staples company. This RBC Global Asset Management (RBC GAM) investment team is based in London, UK and manages over US$8 billion in emerging markets equities. The team’s disciplined investment process considers a broad range of factors and incorporates a strong belief that a company’s ESG record must be analysed in order to truly gauge the company’s overall potential for investment portfolios.

Combining Financial Analysis with ESG Analysis

Marico is a leading Indian consumer staples company that operates in 25 EM countries. It has developed several brands in the hair and skin care, edible oils, health foods and male grooming categories. Its biggest and most famous products being Saffola edible oil and Parachute coconut hair oil.

When the RBC EME team researches a company such as Marico, they begin by reviewing annual reports and financial statements before meeting with the company and carrying out detailed valuation work. When it comes to valuation, the RBC EME team concentrate more on cash flow-based valuation than short-term measures like price-to-earnings or price-to-book.

According to the team, companies that pay attention to ESG factors and stakeholder relationships tend to have higher – and more sustainable – returns over time.

The next step in the evaluation process is the ‘investment checklist,’ which is the key tool for the integration of ESG factors. The checklist has 75 questions divided into three sections: franchise, management quality and corporate governance. The questions are extremely detailed, with approximately two-thirds of the questions related to ESG and sustainability. The checklist is a way to thoroughly understand what motivates a company’s management in terms of its culture, ESG and long-term sustainability, while helping to ensure that the team does not overlook any potential risks. Companies receive a score between 0 and 100 and most companies owned have a checklist score greater than 80.

The questions have a long-term focus and, therefore, scores tend to remain stable over time. Additionally, there is a high correlation between a company’s checklist score and its ultimate weighting in the portfolio.

How a Company Relates to Its Stakeholders

Marico’s company philosophy, “be more, every day,” was created to sustainably transform the lives of all of its stakeholders. This focus on stakeholders is a crucial component in the RBC EME team’s analysis and, accordingly, many of the checklist’s questions relate to how a company treats its various stakeholders.

Marico’s most unique feature is its strong relationships with suppliers and farmers. Marico’s ‘Farmer First’ policy is a key corporate social responsibility initiative. Agricultural produce forms the majority of Marico’s raw materials and consequently, implementing initiatives to improve farmers’ well-being drives Marico’s sustainability efforts. Marico’s engagement with agricultural producers has empowered farmers to strengthen their production systems and increase yields on a sustainable basis. These initiatives are directed primarily towards India’s coconut and safflower growers.

Edible oil is Marico’s key product, with roughly 20% of total sales attributable to Saffola Edible Oil and over 60% market share in India. Safflower seeds are the key ingredient and Marico is India’s largest buyer with 32,000 farmers under contract.

How a Company Improves and Maintains Industry Standards

The checklist asks if a company’s processes emulate best practice and encourage the improvement of industry standards. Marico scores well in this category. Its representatives collaborate with farmers to improve crop cultivation and offer technical guidance throughout the crop cycle. Regular seed-sowing classes are taught by selected farmers to spread ‘best practices’ to other local farms.

The checklist also questions ‘cutting corners’ in production (e.g. using poor quality materials, or not paying suppliers enough). There is no evidence of this at Marico. The company ensures that good quality sowing seed is available to its farmers and its model contract provides farmers with a guaranteed, predetermined ‘fair price’ for seeds; it offers market rates whenever prices rise, and a guaranteed price should they fall. Marico has been instrumental in the introduction of new technology for safflower production and, consequently, has improved productivity.

Thanks to these initiatives, farmers have significantly improved the seed replacement rate resulting in a 2 percentage point increase in oil content from 29.5% in 2011-2012 to 30.15% in 2015-2016. Any increase in the percentage of oil content leads to a significant increase in farmers’ incomes.

Marico generates more than 30% of its revenue from its Parachute coconut oil product, India’s leading brand, with more than 50% market share in India. Marico has developed robust relationships with coconut farmers by showing them how to increase productivity and create long-term crop sustainability and higher returns. The checklist asks whether or not a firm’s culture is innovative and Marico has scored well with its supply chain innovations. Over the last 10 years, collection centres have been set up within a 20-30 kilometre radius of the farms so that small farmers can supply Marico directly. This reduces transportation times and provides farmers with a guaranteed buyer for their produce.

Marico also provides guidance on how to produce coconuts of the right quality that will receive the maximum price, and how to automate the dangerous and lengthy process of harvesting and drying coconuts and extracting the oil. Those farmers who adopted Marico’s best practices early have seen an improvement in productivity of up to 20%, and to date the program has benefitted approximately 7,700 coconut farmers.

The example of Marico and, in particular, its Farmer First policy, demonstrates how important effective management of ESG factors can be in reducing risk, and building a foundation for sustainable long-term growth in EM equities.


  • The information is current as at the 2016/17 financial year.  This information is for illustrative purposes of RBC GAM’s approach and does not constitute an offer, solicitation or recommendation to buy or to sell any security. Any buy or sell decision by RBC GAM would be as a result of any number of factors which may or may not be addressed in this article.
  • The RBC EME team is part of RBC Global Asset Management (UK) Limited
  • Marico Sustainability Report 2015-2016
  • Marico Annual Report 2016-2017
  • as of November 2017
Past performance is not indicative of future results. Market conditions are subject to change. All views, opinions and estimates expressed herein constitute RBC GAM’s judgement as at the indicated date of the information or of this document, are subject to change without notice, and are provided in good faith but without legal responsibility.  Information obtained from third parties is believed to be reliable, but no representation or warranty, expressed or implied, is made by RBC GAM as to its accuracy, completeness or correctness. RBC GAM assumes no responsibility for any errors or omissions.
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.


author's photo

Jason Milne

Vice President, Corporate Governance & Responsible Investment
RBC Global Asset Management

Jason joined the private client department of Phillips, Hager & North Investment Management in 2000 and took on the role of Corporate Governance Analyst two years later. He assumed his current role in 2008 when PH&N was acquired by RBC GAM and is now part of the Corporate Governance & Responsible Investment Group within RBC GAM. The Corporate Governance & Responsible Investment Group oversees all of RBC GAM’s activities related to corporate governance and responsible investment including the more formal integration of Environmental, Social and Governance (ESG) factors into the investment process, proxy voting policy and execution and the development of a more formal program to engage on ESG issues with the companies in which we are invested.