Top fund’s black­list shows ESG hit­ting emerg­ing mkts


A top-per­form­ing emerg­ing­mar­ket bond fund is avoid­ing in­vest­ments in Rus­sia, China, and Saudi Ara­bia as the three coun­tries score too low in its rat­ings for en­vi­ron­men­tal, so­cial, and gov­er­nance risks.

The $1.5-bil­lion Can­driam SRI Bond Emerg­ing Mar­kets Fund has out­per­formed al­most 90 per cent of peers in the past three years and screens for ESG fac­tors. The bot­tom 25 per cent of coun­tries on the fund’s rank­ing get black­listed, no mat­ter how big a role they play in the bond world.

This ap­proach could be a har­bin­ger of the chal­lenges fac­ing de­vel­op­ing na­tions that rely on for­eign cap­i­tal. At the mo­ment sovereign bor­row­ing costs don’t typ­i­cally take into ac­count fac­tors such as com­mit­ment to cut­ting car­bon emis­sions or re­duc­ing cor­rup­tion, but they might in the fu­ture.

“ESG in­vest­ing is gain­ing pace in the emerg­ing-mar­ket debt space,” Magda Branet, deputy head of emerg­ing­mar­ket debt at Can­driam, said in an emailed re­sponse to ques­tions. “Clearly in­vestors will in­creas­ingly look to be com­pen­sated for Esg-re­lated risks. They will de­mand higher risk pre­mia from coun­tries that score poorly in their cri­te­ria, or avoid some is­suers al­to­gether.”

Can­driam’s model eval­u­ates how coun­tries ac­cess and de­ploy nat­u­ral, hu­man, so­cial and eco­nomic cap­i­tal. Regimes deemed to be non-demo­cratic or re­pres­sive are stripped out, along with those with a credit rating lower than B-, or six lev­els be­low in­vest­ment grade. The fund’s big­gest coun­try hold­ings are Mex­ico, In­done­sia and Chile.

Cur­rently the model ex­cludes 33 emerg­ing mar­kets, or about 40 per cent of the Jpmor­gan EMBI Global Di­ver­si­fied In­dex, con­sid­ered the bench­mark for most emerg­ing-mar­ket sovereign bond funds, Branet said dur­ing a we­bi­nar ear­lier this month. The model is re­viewed reg­u­larly, al­low­ing poorly-rated coun­tries the chance to move onto the in­vest­ment list if they im­prove.

There’s cur­rently no in­dus­try-wide stan­dard for ap­ply­ing ESG to sovereign debt, leav­ing most fund man­agers who want to in­cor­po­rate it re­liant on in­ter­nal anal­y­sis. Very few funds ex­clude ma­jor emerg­ing mar­kets due to low scores.

“Green­wash­ing” prac­tices such as mis­us­ing ESG rat­ings are mak­ing it difficult for reg­u­la­tors to pro­tect in­vestors, though pol­icy mak­ers are start­ing to work to­gether to ad­dress this, ac­cord­ing to Chris­tine Kung, head of sus­tain­able fi­nance at Hong Kong’s Se­cu­ri­ties and Fu­tures Com­mis­sion.

Bram Bos, a lead port­fo­lio man­ager at NN In­vest­ment Part­ners BV, says in­vestor de­mands are chang­ing and it’s pos­si­ble that ESG will be­gin to have an im­pact on bor­row­ing costs. Gov­ern­ments and com­pa­nies sell­ing green and so­cial bonds -- where is­suance has hit record highs this year — are al­ready start­ing to see that pay off.

“In the past, there was a road­show when a gov­ern­ment is­sued a bond and it was all about macroe­co­nomic fun­da­men­tals,” said Bos, whose firm man­ages € 287 bil­lion ($336 bil­lion). “Nowa­days, with green and so­cial bonds, other top­ics are also be­ing dis­cussed and that gives in­vestors an­other tool to press gov­ern­ments.”

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