Ola El-Shawarby CFA, Senior Analyst, Van Eck Associates Corporation
David Semple, Portfolio Manager, Emerging Markets Equity Strategy, Van Eck Associates Corporation
Oksana Miller, Product Manager, Van Eck Associates Corporation
The green transition and net zero economies are neither simply the “U.S. problem”, nor the “EU solution”. Every region, every country and everyone (including you and me) will have to change the way we do things. As the impact of this shift comes into focus more globally, in this research piece we assess the Eastern Europe, Middle East and Africa (EEMEA) region and discuss its journey towards a more sustainable future, as well as select investment opportunities from the ESG perspective. Within EEMEA, we highlight two forward-looking and structural growth companies and explain their journeys towards sustainability—Kaspi.kz JSC (2.0% of Strategy assets) and Transaction Capital Ltd. (1.1% of Strategy assets).
EEMEA Region and Its Journey Towards a More Sustainable Future
Similar to our recent research on Asia (i.e., China, India) and LatAm (i.e., Brazil), ESG data availability varies by region and country. As it pertains to EEMEA, we see somewhat selective data availability today, but it is rapidly improving.
Exhibit 1
EEMEA ESG data availability—currently highest in Russia and lowest in the Middle East.
EEMEA ESG data availability - currently highest in Russia and lowest in the Middle East
Data represents simple average of scores by country based onBloomberg ESG Disclosure scores.1 Source: Bloomberg, Datastream and Morgan Stanley Research. Data as of November 3, 2021.
Having said that, EEMEA ESG scores have been improving across the region. 73% of EEMEA companies have recorded improving scores over the past year across key data providers (i.e., Bloomberg). This trend improvement has been ongoing for the past five years now.
Exhibit 2
EEMEA ESG scores have been improving across the region, with Russia and South Africa leading.
EEMEA ESG scores have been improving across the region, with Russia and South Africa leading
Data represents simple average of scores by sub-region based on Bloomberg ESG Disclosure scores. Source: Bloomberg, Datastream and Morgan Stanley Research. Data as of September 29, 2021.
Another interesting observation would be improvements in EEMEA ESG disclosures by type—with Governance (“G”) disclosure being the highest and Environmental (“E”)—the lowest.
Exhibit 3
EEMEA ESG scores have been improving across the region, with “G” paving the way. “E” is an area of improvement going forward.
EEMEA ESG scores have been improving across the region
Data represents simple average of scores by type based on Bloomberg ESG Disclosure scores. Source: Bloomberg, Morgan Stanley Research. Data as of November 3, 2021.
EEMEA’s Innovators in Action
Company Description
Kaspi.kz JSC (Kaspi) (2.04% of Strategy assets) is the leading payments, marketplace and fintech platform in Kazakhstan. Kaspi’s business model is highly profitable and leverages a well-integrated ecosystem that supports growth across all three of its business segments. It also has plans to expand across Central Asia and the Caucasus in the near future starting with Ukraine.
Payments—Kaspi facilitates technology-enabled cashless payments and enables merchants and consumers in Kazakhstan to transact digitally using a variety of products. In many cases the payments platform is used to onboard new customers and merchants on the platform, allowing Kaspi to offer them other goods and services through its “super app” strategy.
Marketplace segment offers huge growth potential, as Kazakhstan's e-commerce market remains largely under-penetrated at approximately 9% (versus 25% in the U.S./32% in China), with Kaspi having a market share of approximately 45%.2
Fintech—having its origins as a consumer finance bank before transitioning into a more integrated service provider through a super app, Kaspi continues to offer consumer lending products through its platform including “buy now pay later” products to leverage its solid consumer data and credit risk experience and capitalize on the strong growth opportunity in Kazakhstan’s underpenetrated consumer finance segment with consumer loans to GDP at 10.6%.3
ESG Opportunity
Environmental and Social Impact through Digital and Fintech
The company’s ESG opportunity is in its “E” and “S” impact—through its digital payments and fintech platforms, with Kaspi servicing under-served local consumers.
Key ESG Factors5
Environmental
Payments and fintech business—transitioning to a cashless society which has a positive impact on “E.”
Digital and fintech platforms are environmentally friendly by design as digital payments and the rising penetration of online consumer lending products increase efficiency with cashless transactions replacing cash withdrawals in the economy. This year (Jan. – Jun. 2021), cashless payments reached and impressive approximately 95% of total payments in Kazakhstan.6
Marketplace—Kaspi Postomat.
In an effort to reduce pollution and traffic congestion as e-commerce penetration rises, the company launched Kaspi Postomat, a network of delivery lockers which significantly reduces the number of delivery trips needed relative to door delivery. With delivery lockers also being at least 20% cheaper, they are considered more accessible/affordable, catering to a wider consumer segment. Kaspi plans to install 300 operational lockers in Almaty by year end 2021 and nationwide coverage is scheduled by year end 2022.
Social
Meaningful social impact through payments, marketplace and fintech platforms.
Kaspi offers exposure to a digitally and financially under-served local population on both the merchant and consumer sides, whom it serves with an advanced technology-enabled offering of payments solutions, marketplace and financial services, thereby increasing access, efficiency, convenience and affordability.
Exhibit 4 Kaspi.kz Merchant & Micro Business Finance already at 7% of total in the third quarter 2021.
Kaspi.kz Merchant and Micro Business Finance already at 7% of total in the third quarter 2021
Kaspi.kz Merchant and Micro Business Finance already at 7% of total in the third quarter 2021
Governance
Board of Directors Composition.
Kaspi’s Board of Directors is committed to the highest standards of corporate governance. The company’s Corporate Governance Code, which was adopted in 2018, is largely consistent with the principles of governance applicable to Kazakhstan companies whose shares are listed on KASE. The company has 50% (three out of six) independent directors and one female director, and the average tenure of the board is five years.
Alignment with international frameworks and standards. Proper ESG disclosure.
This is an area for improvement for this company. In the near future, we would expect to see its public commitment to alignment with widely accepted international frameworks and standards. And as a result, better disclosure of sustainability activity across the three business verticals should follow as well.
Company Description
Transaction Capital Ltd. (1.18% of Strategy assets) is a niche financial company from South Africa, operating across three business lines:
SA Taxi is a vertically integrated platform, using proprietary data and technology to provide developmental finance (i.e. micro lending), insurance and other services to empower small- and medium-sized minibus taxi operators.
WeBuyCars is a trusted trader of used vehicles, offering finance, insurance and other financial products through its vertically integrated physical and e-commerce infrastructure.
Transaction Capital Risk Servicers (TCRS) is a technology-led, data-driven provider of services and capital solutions relating to credit-oriented alternative assets spanning across South Africa, Australia and other select international markets.
ESG Opportunity
Social Impact through Inclusion
Transaction Capital’s focus on under-served market segments where it can make a meaningful social impact is the most pronounced ESG opportunity for this company.
Key ESG Factors7
Environmental
Promoting climate resilience
SA Taxi—New minibus taxis sold (supporting lower emissions): 4,064. Pre-owned minibus taxis sold with an increased focus on quality refurbished pre-owned vehicles (supporting circular economy): 2,186. TCRS—Continued initiatives to reduce electricity and water consumption and manage waste in operations, which are considered to have a low overall impact already.
Social
Supporting social inclusion SA Taxi empowers small- and medium-sized enterprises (SMEs) through financial inclusion:
Proportion of SA Taxi’s SME customers classified as previously under-banked or financially excluded: approximately 80%.
Percentage of loans provided to black-owned SMEs: 100%.
Total number of direct jobs created in financed fleet in 2020: 11,250.
Facilitating a safe and affordable alternative to lacking public transit.
Given the lack of mass transit infrastructure and the low affordability in South Africa, SA Taxi provides an affordable and safe alternative for people to move around and get to their jobs and homes who cannot afford either vehicle ownership or higher-end ride-hailing options like Uber.
73% of South Africans rely on public transportation and within that the share of minibus taxi has grown by 16% since 2013 to a share of 84% today with approximately 15 million commuter trips daily, proving to be an essential and non-discretionary public service.
Hiring inclusively and empowering employees.
Number of employees: 3,965.
Female employees: 59%.
Total employee turnover rate: 34%.
Governance
Alignment with international frameworks and standards. Proper ESG disclosure (public)
The company uses ESG World8 as a public platform to give the investment community easy access to its ESG database in the areas of ESG and other related sustainability agendas that are referenced in the United Nations Sustainable Development Goals (SDGs), Task Force on Climate-Related Financial Disclosures (TCFD), Global Reporting Initiatives (GRI) standards and the Sustainability Accounting Standards Board (SASB), amongst other sustainability frameworks and standards. This platform is updated on a regular basis to communicate the company’s latest disclosures.
Alignment with different stakeholdersTransaction Capital proactively engages with shareholders and other stakeholders to ensure long-term alignment of interest. One example of stakeholder and shareholder alignment is that in 2018, TC Group sold 25% of SA Taxi to The South African National Taxi Council (SANTACO) to allow industry participants to share in the revenue streams of the taxi industry across the value chain, while simultaneously ensuring sustainable alignment of industry participants with the company and its shareholders.
Conclusion
The green transition is happening and it is happening now. Regardless of a company’s industry or sector, country or region, this transformation will involve breakthrough solutions across the board that will essentially transition us from the greenhouse gas-producing tools we currently rely on to a new set of innovations powerful enough to give everyone in the world access to clean, reliable and affordable energy. Concurrently, we expect the VanEck Emerging Markets Equity Strategy to continue investing heavily in the lead players in EEMEA’s, and the world’s, transition.
Originally published by VanEck on December 22, 2021.
1 Bloomberg ESG disclosure score (definition and methodology). Bloomberg ESG data coverage comprises 11,800+ companies; 410,816 active securities; 100+ countries; 88% of global market cap; and 2,100+ ESG data fields (including third party data) as of 11/30/2021. Bloomberg ESG disclosure score is a 0-100 score calculated using a subset of raw data points Bloomberg collects on ESG. It is designed to measure the transparency of companies’ disclosure of ESG information released by the company so it is not a performance score but a score based on the amount of reported data. This scoring methodology is designed to measure the robustness of companies’ disclosure of ESG information in their reporting/the public domain. They are tailored to different industry sectors, and metrics are weighted in terms of importance to users of that industry. For more details see here.
2Source: VanEck Research, Morgan Stanley Research. Data as of October 26, 2021.
3Source: National Bank of Kazakhstan, EFG Hermes estimates for FY2020.
4 Over the next 10 years or so, fintech should have materially positive social impact, helping to lift tens of millions of people out of poverty, creating jobs, providing access to credit and introducing basic savings and investment to the rural poor. And this will be with little or no negative impact on the environment.
5Source: VanEck Research. Data as of December 2020.
6Source: EFG-Hermes, Company Data. Data as of November 17, 2021.
7Source: VanEck Research, Company Data, Bloomberg, ISS. Data as of November 30, 2021.
8 ESG World – for additional information on ESG World and Kaspi.kz disclosures, please click here.
9Source: Breakthrough Energy. 2021.
Please note that VanEck offers investments products that invest in the asset class(es) or industries included in this commentary.
*All company weightings are as of November 30, 2021. Any mention of an individual security is not a recommendation to buy or to sell the security. Strategy securities and holdings may vary.
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Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the strategy’s investment objective, inclusion of this statement does not imply that the strategy has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.
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