Emerging market investors to seek returns from ESG

Pandemic prompts fund managers to re-strategise

HONG KONG: Emerging-market investors may have identified the assets that offer sustainable post-pandemic returns. Now they just need to find more of it.

The worst crisis since World War II is prompting some fund managers to rethink their strategies in a world with US$13.7 trillion of sub-zero yielding debt and an increasing view that a V-shaped recovery is unlikely. Seeking opportunities in environmental, social and governance (ESG), investments in countries and companies that are improving ESG standards, are becoming crucial more than ever as investors navigate the pandemic-stoked market volatility.

“This is a crisis unlike anything we’ve seen and we cannot just go back to our old textbooks anymore that say ‘go buy the dip’,” said Thu Ha Chow, a money manager at Loomis Sayles Investment Asia Pte, who has been investing since Enron’s collapse.

“The social and governance elements are going to be more important, but they can be harder to find in emerging markets.”

The conundrum lies in the scarcity of such true assets and the difficulty of identifying them in developing economies.

While Esg-focused developing stocks and bonds have trounced returns of traditional peers as the pandemic raged, they’re a minority across the US$28 trillion emerging-market universe. Just Us$11bil of the Us$84bil raised in bonds this year whose proceeds are applied to projects aimed at helping society came from developing-nation borrowers.

The coronavirus has splintered the world economy, exposing social responsibility and governance fault lines across continents. The fallout has been worse in less developed nations, which typically dedicate about 5% to 6% of GDP to health spending. That’s less than half the 14% average of wealthier countries.

As Brazil and India overtake the likes of Italy and Spain as pandemic centers, funds are scrutinising the shelf life of their investments as emerging markets face their first annual contraction in six decades.

“EM markets which have relied more on natural resources and traditional manufacturing business will face a more uncertain future,” said Adrian Zuercher, co-head of global asset allocation at UBS Wealth Management.

The pandemic has “put focus on the critical need to build resilience in healthcare, food and water security, and across supply chains,” said Ingrid Kukuljan, head of international impact investing at Federated Hermes in London, in a note. “We will increasingly see governments transfer funds to the private sector to address these pressing needs, which has proven true during this crisis.”

While such bets have paid off – a gauge of ESG stocks has gained 4.4% in the past year compared with a 3% rise in a broader EM index – the lack of good research into such assets is hampering the market, money managers say.

Companies and governments in many emerging markets are not legally obliged to disclose as much ESG information as they are in developed nations. This has led to worries that lower standards, or greenwashing by companies that don’t have measurable rules could prove disastrous for investors.

Vale SA’S dam collapse in south-eastern Brazil a year ago unleashed 9.7 million cubic m of mining sludge that buried part of a town and killed 270 people. The catastrophe wiped out a quarter of the miner’s market value at one point, and has scarred the company’s reputation.

“You need to have your own proprietary fundamental research,” said Claire Peck, an investment specialist in London at Jpmorgan Asset Management, with US$1.9 trillion in assets.

“You have to be more research intensive as an investor because of that lack of transparency and also lack of coverage by major ESG providers.”

“The social and governance elements are going to be more important, but they can be harder to find in emerging markets.” Thu Ha Chow