ESG And Emerging Markets: Five Myths To Ignore

Myth one: ESG risks are higher in EM than in developed markets (DM)

History shows us the most momentous cases of ESG failure occur because of human shortfalls, caused mostly by poor management decisions and, in many cases, a desire to maximise profits. Of course, a colossal gap stretches between the strong and the weak credits in both EM and DM, but the best-run companies in EM are also among the best-run in the world. A high proportion of EM companies have global operations and are penalised for being based in countries with poor macroeconomic dynamics.

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Demand for corporate responsibility and disclosure is a global requirement for investors in EM and DM in equal measure.

Myth two: ESG data in EM is lacking

EM data related to ESG does exist, but it can be compiled and assessed only in conjunction with a thorough fundamental investment process. EM represents a vast and diverse investible universe incorporating over 70 countries, and its traded debt markets have a market capitalisation of over $22trn. However, EM represents only around 7% of global bond indices, but its debt stock represents some 27% of the world's total. EM is therefore hugely under-represented in investment terms, which goes some way to explaining the perception that ESG data is scarce.

Using ESG screening, today we have nearly 400 companies across EM currently under active coverage, with each having a full suite of ESG data.

Myth three: Markets do not price ESG factors into EM

ESG factors are very much priced into valuations in EM. However, the hugely diverse universe makes valuations extremely varied across industry sectors and regions.

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For example, one of South Africa's leading national power companies has the lowest credit ratings, the highest spread versus its host country's bonds and the highest-risk ESG score, which all makes intuitive sense. However, a large Russian gas producer has a higher credit rating, a comparatively high-risk ESG score, and yet the lowest spread versus its host country's bonds. Several factors explain the anomaly, including the sovereign's influence/support and credit rating, the macroeconomic dynamics of the country, and the Russian gas producer's stand-alone credit profile.