Sunday, April 5, 2009

Sustainable investment growing in emerging markets

Sustainable investment in emerging markets has grown significantly over the past few years, to more than $300 billion US in 2008, according to a study conducted by Mercer and commissioned by the International Finance Corporation, the private arm of the World Bank Group. That figure represents nearly 10% of total investment in emerging markets.

Funds labeled specifically as socially responsible or sustainable represented about $50 billion in assets, but this represents only a tiny fraction (1.5%) of total emerging market investments compared to 2.73% in developed markets. The remainder was comprised of mainstream institutional funds committed to integrating environmental, social and governance (ESG) issues within their core investment processes.

“The recent financial crisis reveals the critical value of global economic sustainability and underscores the importance of transparency and accountability in all markets,” the study says. “While asset managers in developed markets are often credited with being a step ahead in factoring ESG issues into investment decisions, this latest research reveals that emerging market asset managers are beginning to take ESG issues seriously.”

The project included a survey of 514 equity managers from around the globe, of which 177 managers were invested in emerging markets. Of those who invest in emerging markets, almost half (46%) had a policy regarding the integration of ESG issues in their investment processes.

"The research found pockets of innovation, with many local fund managers in emerging markets having deeper knowledge and understanding of social issues than their global counterparts,” said Danyelle Guyatt, head of research at Mercer’s Responsible Investment unit. “However, there is also potential for improvement in practices, particularly in the utilization of active ownership tools such as voting and engagement.”

Interestingly, a very small proportion of emerging market products are branded SRI (7%). But this underestimates the true number of SRI funds available to investors, the study notes, as there are a significant number of funds available which are not branded as SRI, but which do follow socially responsible practices, such as Shariah-compliant funds.

Despite evidence of growth, there’s no clear evidence the ESG trend will continue at this pace in emerging markets. Looking forward, less than a quarter of managers with emerging market equity strategies are expecting to make changes to improve their ability to integrate ESG issues into the investment process. A large number do not intend to, or remain undecided. “So the jury is still out as to how fast practices will improve,” the study concludes.

A pdf version of the full report is available here.

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