Survey: responsible investors optimistic on emerging markets

The report “Evolving markets: what's driving ESG in emerging economies?” explores the strong currents that are carrying forward corporate performance and disclosure on Environmental, Social and Governance (ESG) issues in emerging markets. The 2012 analysis focuses on 800 companies spread across 30 emerging economies, building upon survey outcomes on 20 quantitative and qualitative questions on a range of investment issues related to both emerging markets and ESG factors.

By 2020, emerging market gross domestic product (GDP) will overtake developed market GDP for the first time, 85 percent of the world's population will live in emerging markets and consumer spending in China and India alone is estimated to treble to US $10 trillion. At the same time, global sustainability mega trends like resource scarcity and human rights will have a significant impact in these makets. Also, the threats of climate change are more material in emerging markets, where vulnerability to extreme weather events and rising sea levels is greater as there are fewer resources for protections such as flood defenses.

Strong demand for ESG

Besides the overall growth in emerging market investment, EIRIS reports a call by the investors for improved ESG disclosure and performance— not surprising because around two thirds of the respondents have committed to the Principles for Responsible Investment. The surveyed investors realize that the incorporation of ESG issues into the investment process to reduce risk, drive performance and identify investment opportunities can have a positive influence on the financial performance of companies — particularly over the long-term. More than 78 percent of surveyed investors are concerned that poor corporate ESG disclosure remains the number one challenge to investing in emerging markets. There is a strong demand for ESG research on the classic three pillars of governance, environment and international norms such as human rights and corruption.

Heightened materiality of ESG issues

There is a heightened materiality of ESG issues in emerging markets, EIRIS writes. “Whether it is deforestation of the Amazon in Brazil, the conflict between Vedanta and indigenous peoples in India or environmental pollution or labor issues in China; it is clear that company ESG issues have a major impact on peoples’ lives in emerging markets. For this reason there will be strong pressure from those affected, or likely to be affected, to mitigate the negative impacts of company operations… The ‘push’ factors driving increased demand for ESG information from emerging market companies, reflect pressures from a wide range of stakeholders including NGOs, campaign groups, trade unions, community representatives and, crucially, by some emerging market governments.”

Leapfrogging developed-world peers

Further highlights from the research include the observation 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. Also, governments in Brazil and South Africa lead on initiatives to encourage corporate ESG performance, whilst China, India, Turkey, Mexico and Hong Kong are making progress. Josh Brewer, head of Financials and Technology team at EIRIS states: "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".

"Lower returns and increased risk and volatility in developed markets has potentially resulted in a recalibration of risk/return ratios that make emerging markets more attractive to investors. Our report highlights the enormous investment potential which emerging markets offer, but also the significant ESG risks that need to be addressed by investors into these markets", according to the report author.

References

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “Survey: responsible investors optimistic on emerging markets”, www.tias.edu, January 30, 2013.

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EIRIS Report