chinazh
Fact or fiction: SI does not work in emerging markets

Fact or fiction: SI does not work in emerging markets

08-08-2018 | 市场观点

Sustainable investing is well established in the West, though some doubt whether it can work in emerging markets battling with bigger issues. In fact, experience shows that emerging markets present both a huge investment opportunity and a distinct set of environmental, social and governance ( ESG ) risks and challenges.

  • Masja Zandbergen - Albers
    Masja
    Zandbergen - Albers
    Head of sustainability Integration

Speed read

  • ESG adoption has been much lower in emerging markets
  • It’s still possible to find sustainable equities and bonds
  • Better governance and impact investment is also helping

Environmental threats include mass urbanization and deforestation, while the continuance of child or slave labor along with low pay presents social problems, and high levels of state or private ownership give rise to governance issues. Some emerging countries can’t adequately feed their own people, let alone adopt solar power or electric cars.

This sense of how poorly sustainability is adopted in Asia, for example, is reflected in figures by the Global Sustainable Investments Alliance. It said that of the USD 22.9 trillion invested by its members at the end of 2016, just USD 52 billion or 0.2% was in Asia outside Japan.1

So, is there any point in trying to invest sustainably in these regions? In fact, these very problems make using ESG even more important when building emerging market portfolios, particularly in knowing where to look for the bright spots.

And it has an even greater effect: research shows that while adopting ESG factors in developed markets has a positive effect on corporate financial performance in 38% of cases, for emerging markets that positive effect is seen in 65% of cases. Addressing the governance factor was shown to have the greatest influence.2

Figure 1 | Relationship between ESG and corporate financial performance

Source: Friede et al (2015)

One way of creating more sustainable emerging markets funds is by taking a quantitative approach through factor investing, as discussed in a 2017 white paper by the Robeco quant team, ‘Going for green alpha in emerging markets’. In practical terms, this is done by building a portfolio that is 20% more sustainable than the benchmark, with a 20% lower footprint for water use, CO2 emissions, waste and energy use. In addition, this method uses an extensive values-based exclusion list, excluding companies from industries such as coal, tobacco, gambling and firearms production.3

It can also be important to combine differing emerging market strategies for equities, using both a fundamental approach looking at traditional ESG factors, and a quant approach seeking factors such as low volatility, where some markets offer the same returns at a lower risk. This is discussed in another Robeco white paper, ‘Combining quant and fundamental to diversify your emerging market equity portfolio’.4

Targeting emerging debt

Getting reliable data to be able to make informed decisions is part of the battle. Robeco’s emerging markets team has built a significant database that can assess risks and opportunities when building portfolios, using a combination of top-down factors to analyze countries and bottom-up criteria to find the best securities.

For the top-down assessments, the team makes use of RobecoSAM’s Country Sustainability Ranking (CSR). This twice-yearly report looks at a range of factors that particularly affect emerging markets, including susceptibility to corruption, levels of internal dissent, relative freedoms of the press and vulnerability to commodity prices such as oil for economic success. It contains and all-country index and a bespoke emerging markets index. The bottom three nations in the October 2017 emerging markets CSR were Nigeria, Pakistan and Venezuela, while the top three were Singapore, Hong Kong and the Czech Republic.5

The truth about sustainable investing: fact & fiction
Watch the video

Governance improvements

One area in which sustainability can be shown to have made a difference is in corporate governance improvements in Asia. Robeco has long engaged with investee companies to try to address issues such as the lack of women or independent directors on boards, or unfairly treating minority shareholders. Governance improvements have been so tangible in Japan and South Korea that stock market multiples are now expected to rise, Robeco reported in October 2017.6

Meanwhile, the adoption of voluntary Stewardship Codes in Asia which promote active ownership by investors has increased levels of engagement, voting at shareholder meetings, and exclusions of companies that don’t meet minimum requirements, generally raising standards.

Perhaps the last word should go to the authors of an influential research paper by the specialist ESG data provider Sustainalytics entitled ‘Bridging the gaps: effectively addressing ESG risks in emerging markets. “Emerging markets present both a huge investment opportunity as well as a distinct set of ESG risks and challenges,” they said.

“Although investors generally perceive ESG risks to be larger in emerging markets than in developed markets, they are applying responsible investment strategies to a lesser degree when making emerging markets investments. Yet, especially in the context of emerging markets, addressing ESG risks can be very rewarding for investors wanting to reduce portfolio risks or looking for investment opportunities.”7

1 Global Sustainable Investment Alliance, 2017 Review
2 Gunnar Friede, Timo Busch & Alexander Bassen, ‘ESG and financial performance: aggregated evidence from more than 2000 empirical studies’ , Journal of Sustainable Finance and Investment, November 2015.
3 Wilma de Groot and Tim Droge, ‘Going for green alpha in emerging markets’, 2017
4 Fabiana Fedeli and Wilma de Groot, 'Combining quant and fundamental to diversify your emerging market equity portfolio’, 2017
5 For more information about how the CSR is compiled, go here
6Interview with Arnout van Rijn, Chief Investment Officer for Robeco Asia-Pacific Equities, October 2017
7 Andrea van Dijk, Lotte Griek and Chloe Jansen, ‘Bridging the gaps: effectively addressing ESG risks in emerging markets’ , Sustainalytics, 2012.

Sustainable Investing
Sustainable Investing

Discover all on sustainable investing.

Read more

免责声明:

本文由荷宝海外投资基金管理(上海)有限公司(“荷宝上海”)编制, 本文内容仅供参考, 并不构成荷宝上海对任何人的购买或出售任何产品的建议、专业意见、要约、招揽或邀请。本文不应被视为对购买或出售任何投资产品的推荐或采用任何投资策略的建议。本文中的任何内容不得被视为有关法律、税务或投资方面的咨询, 也不表示任何投资或策略适合您的个人情况, 或以其他方式构成对您个人的推荐。 本文中所包含的信息和/或分析系根据荷宝上海所认为的可信渠道而获得的信息准备而成。荷宝上海不就其准确性、正确性、实用性或完整性作出任何陈述, 也不对因使用本文中的信息和/或分析而造成的损失承担任何责任。荷宝上海或其他任何关联机构及其董事、高级管理人员、员工均不对任何人因其依据本文所含信息而造成的任何直接或间接的损失或损害或任何其他后果承担责任或义务。 本文包含一些有关于未来业务、目标、管理纪律或其他方面的前瞻性陈述与预测, 这些陈述含有假设、风险和不确定性, 且是建立在截止到本文编写之日已有的信息之上。基于此, 我们不能保证这些前瞻性情况都会发生, 实际情况可能会与本文中的陈述具有一定的差别。我们不能保证本文中的统计信息在任何特定条件下都是准确、适当和完整的, 亦不能保证这些统计信息以及据以得出这些信息的假设能够反映荷宝上海可能遇到的市场条件或未来表现。本文中的信息是基于当前的市场情况, 这很有可能因随后的市场事件或其他原因而发生变化, 本文内容可能因此未反映最新情况,荷宝上海不负责更新本文, 或对本文中不准确或遗漏之信息进行纠正。