Is ESG investing in emerging markets like walking a tightrope?
Encouraging MEs to focus on ESG is not without challenges
The destruction that Covid-19 has wrought in the markets has given new life to ESG investing in emerging markets, according to investment professionals, who recognize that the market area is not a typical hunting ground for investors. investors who care about the environment and society.
Funds that follow ESG principles posted record inflows last year, with asset managers raising $ 51.1 billion in new assets – more than doubling the hold of 2019 – according to the latest figures from Morningstar.
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As the Covid-19 crisis has changed attitudes about investing, investors have sought ESG opportunities in countries and companies where environmental, social and corporate governance factors are only beginning to take hold. magnitude.
However, jumping on opportunities in emerging markets that offer sustainable returns after the pandemic is not without risks.
The lack of standard of analysis, gaps in data and the different measures of ESG rating agencies make it difficult for investors to measure whether a fund that qualifies as sustainable is genuine.
This conundrum is especially true in developing economies where reliable data is scarce.
Eli Koen, emerging equities portfolio manager at UBP, doesn’t think emerging markets have a monopoly on bad ESG data, but admits they present unique challenges.
“On the one hand, you have companies [across emerging markets] which provide much better quality ESG data than in developed markets, ”said Koen.
He cited companies in Chile and South Africa that provide high-level ESG data as good examples.
“But on the other hand – and this is what sets it apart from Europe – we have companies that are really cold about data disclosure, that have no idea about sustainability or ESG reporting and that are really late. “
Focus on green shoots
For investors seeking higher returns while navigating the uncertainty of the post-pandemic market, the ESG opportunities in emerging markets have been generous.
Over the past decade, the MSCI Emerging Markets ESG Leaders Index, which tracks companies with strong ESG performance relative to their peers, has outperformed the broader MSCI Emerging Markets Index with a total return of 14.5% compared to 10.7% in the larger market, according to data from indexing firm MSCI.
John Malloy, Co-Head of Emerging and Frontier Markets at RWC Partners, said it was essential to focus on ESG in emerging markets; with significant leeway in these markets to effect lasting change.
“Sustainability is a function of [emerging markets’] development, and it is therefore essential to promote responsible business practices, uphold human rights and protect the environment. “
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As markets worry about declining ESG standards and greenwashing, Dimitry Griko, CIO at EG Capital Advisors and manager of EM Corporate HY Bond fund, said investors should do their homework when investing for the better. sustainable in emerging markets and decide what shade of green they are comfortable with.
“If your ESG approach is that they must have perfect governance, they cannot [carbon] emissions or 50% of the workforce must be women and the board must be split the same, it is not. This is not how emerging markets work, ”he said.
Griko added that investors will face pollution, an unequal workforce and their fair share of problems in developing economies. The big question, he argues, is how to approach these problems.