Responsible investors expanding into emerging markets

Responsible investment allocations to emerging markets have increased to about US$161 billion, up from US$125 billion in 2009, a 30% rise, according to a survey of more than 40 global responsible investment houses by RI researcher EIRIS.

The US$161 billion figure represents about 7% of the survey respondents’ total assets under management. 

Around a quarter of investors indicated that they have increased their exposure to emerging markets in the aftermath of the financial crisis. “Arguably one of the positive effects of the crisis has been to convince an increasing number of mainstream investors of the value of taking factors such as climate change, environmental and social disclosure and corporate governance into account when making their investment decisions and exercising their ownership obligations,” the survey says.

The survey points to a “heightened materiality” of ESG issues in emerging markets.

“Whether it is deforestation of the Amazon in Brazil, the conflict between Vedanta and indigenous peoples in India or environmental pollution or labour issues in China it is clear that company ESG issues have a major impact on peoples’ lives in emerging markets,” the survey said. “For this reason there will be strong pressure from those affected, or likely to be affected, to mitigate the negative impacts of company operations. This is likely to feed into demands for better ESG disclosure and performance.”

The survey found that stock exchanges in Brazil and South Africa have leapfrogged their developed-world peers by creating advanced ESG listing requirements, sustainability indices and other products to drive disclosure.

"The term 'emerging markets' is increasingly outdated, especially when applied to huge markets like China - the second largest economy in the world. South Africa and Brazil are leading the way with ESG initiatives which developed markets could well learn from,” said Josh Brewer, report author and Head of Financials and Technology team at EIRIS.

Poor corporate ESG disclosure remains the number one challenge to investing in emerging markets, with more than 78% of surveyed investors mentioning it. Environmental issues, compliance with international norms and corporate governance remain core responsible investment concerns in emerging markets, just as they are in developed markets, the survey said.

Investors named ESG-themed funds as the most popular emerging markets investment strategy, followed closely by general socially responsible investment funds and then niche SRI funds.

China was identified as the most popular emerging market, followed by Brazil, Taiwan, Thailand and India. The survey also asked responsible investors which emerging market countries were making positive steps towards ESG disclosure; Brazil, South Africa and Turkey were identified as ESG leaders.

“The identification of Brazil and South Africa as leaders in terms of ESG is borne out by EIRIS research, with a majority of companies from these two countries consistently scoring better than their emerging market peers,” the survey said. “In fact, the top ranked companies from Brazil and South Africa often do as well, or better than, the best  performers from any markets, developed or emerging.”