ESG investment opportunities in emerging markets are being obscured by corporate disclosure that is less comprehensive when compared to more developed counterparts, according to an investment director.
“In general when looking at emerging markets, corporate disclosure is less comprehensive than in more developed markets, particularly around sustainability and environmental, social and governance factors,” says Fiona Manning, senior investment director at Abrdn.
“This information imbalance, combined with lower depth of coverage from the various ESG ratings agencies, means that quite often companies receive relatively poor ESG scores, which do not properly reflect the reality of their operations.
“This represents an opportunity for active managers to identify ESG leaders through thorough research and analysis.”
Carlos Hardenberg, a founding partner at Mobius Capital Partners, which adopts an active ownership approach to emerging and frontier market equities, agrees that lower standards regarding transparency, reporting and corporate governance continue to pose significant challenges to emerging market investors.
“Most companies in emerging markets do not have an ESG rating. For active investors who focus on constructive engagement, this is a great opportunity as engaging on ESG creates value, serves as risk protection and drives performance in the long run.”
Daniela da Costa-Bulthuis, a portfolio manager in the emerging markets team at Robeco, and co-portfolio manager of its global SDG engagement fund, agrees there are advantages to engaging with emerging markets on sustainability.
“EM companies often welcome collaborations with investors on the topic, and react with changes or enhancements in strategy many times faster than global companies in developed markets.
“Building a partnership with emerging market companies through engagement programs can enable investors to share knowledge of best practices and new insights with a company’s management team, thereby boosting the firm’s sustainability and financial performance.”
In Chile there is an abundance of solar and wind power to harness and as such, the country has extensive capacity for renewable energy.Jared Cook, AXA Investment ManagersAnother sustainable investment opportunity in emerging markets relates to climate, says da Costa-Bulthuis. “EM countries harbour most of the world’s resources needed to fight climate change and biodiversity loss, offering plenty of opportunities to invest.
“Most emerging countries are in water-rich, sunny areas with vast coastline, having the best natural resources and climate conditions to develop renewable energy, such as hydro, solar and wind energy.”
Jared Cook, a fixed income investment specialist at Axa Investment Managers, a responsible asset manager, highlights Chile as one such example.
“In Chile there is an abundance of solar and wind power to harness and as such, the country has extensive capacity for renewable energy. It has also pledged to become the top producer and exporter of green hydrogen, a strong sustainability initiative designed to drive down consumption of fossil fuels.”
Investing in sectors that provide basic needs and reduce the inequalities in emerging markets is a good way to impact and promote the achievement of the Sustainable Development Goals.Daniela da Costa-Bulthuis, RobecoDa Costa-Bulthuis also cites the Sustainable Development Goals as another investment opportunity in emerging markets. “We believe that investing in sectors that provide basic needs and reduce the inequalities in emerging markets is a good way to impact and promote the achievement of the SDGs.
“Good examples would be investing in infrastructure, sanitation services and hygiene products, banking focused on low income and SME financing, education and healthcare providers.”
James Johnstone, co-head of the emerging and frontier markets team at Redwheel, likewise says that several of its investment themes align with the SDGs.
“One of the team’s core themes, financial inclusion, focuses on promoting access to financial services to millions of unbanked, low income and otherwise disadvantaged parts of the population in emerging and frontier markets.
“The team invests in banks that work with governments to promote affordable housing, fund women in business and support SMEs run by ethnic minorities in rural areas. This is where the team sees tremendous opportunity from both investment and equality, diversity and inclusion perspectives.”
The forecasted $260bn issuance of green bonds will be a key opportunity for investors going forward.Jared Cook, Axa Investment ManagersCook at Axa Investment Managers also sees opportunities in green bond issuance from a number of emerging market countries.
“The rise of sustainability in emerging markets is clearly reflected in the growth in the sustainable bond market. In 2020 there was $40bn of green bond issuance in emerging markets, with a further $260bn expected by the end of next year.
“As the green bond market continues to grow, there will be significant opportunities for investors to finance the transition to a greener and more sustainable approach in emerging market countries.”
Chloe Cheung is a senior features writer at FTAdviser
