Why responsible investment has greater potential in EMs
Insights

Why responsible investment has greater potential in EMs

With more room for businesses to improve their environmental, social and governance credentials comes greater potential alpha generation, making company selection and data analysis key
The emerging markets universe has 26 countries and, arguably, environmental, social and governance (ESG) issues matter far more in these regions than in developed markets. There is more room for companies to improve and for investors to influence change, for the good of society and investors themselves. That means greater potential for alpha generation and having a positive impact. Emerging markets rely more on natural resources and have more labour-intensive manufacturing businesses, so there is naturally more opportunity for improvement.
ESG standards are also beginning to matter more. Consider the growing populations, rising middle class, urbanisation and expanding energy consumption. Clearly you need to improve regulation and governance for these economies to grow in a responsible way. Countries such as China and India are jumping ahead in terms of renewable energy adoption. India has a target of generating 57% of its energy from renewable sources like wind and solar by 2027.1
ESG investing in emerging markets adds value. Research from the University of Waterloo in Canada shows that the MSCI Socially Responsible Investing (SRI) Index not only ranked higher in terms of mean return than most emerging market portfolios, but also was less vulnerable to negative shocks.2

Finding ‘quality’

There is a huge spectrum of “quality” – defined in terms of both ESG and investment generally – but I would argue this is greater in EM than in developed markets. Quality businesses look after the interests of investors, employees and society; they manage capital responsibility and have good corporate governance. Well-run businesses can take market share away from competitors such as state-owned enterprises that aim primarily to provide employment and 

Clearly, there is also a long list of bad players. While the situation is improving, loose regulations and unstable policy environments do allow bad practice to continue.

Data analysis

Our data models act as a first screen, allowing fund managers to focus their research with greater intensity. A fund manager may, for example, look at a company that the models indicate as being of lower quality but decide it is improving and that is not being picked up by the models quite yet. There is a great opportunity to generate alpha by engaging with these companies to uncover hidden value. That’s where our most fruitful dialogue happens.
Columbia Threadneedle’s bespoke responsible investment model has more than 250 million data points. We are also working on a platform to go alongside that with more than three billion data points. The data covers about 90% of the MSCI Emerging Markets Index and tells us if a company is making an impact or not. Even if a company doesn’t publish a data point, you can infer that through machine learning by capturing related data. For instance, gallons of water used, or hazardous waste emitted. While there is still less data in emerging markets, corporate disclosures are growing quickly in response to pressure from governments and large investors like sovereign wealth funds and pension funds.

Emerging market themes

Among the themes we are interested in is FinTech, which is an exciting area because it increases financial inclusion across our markets. There are huge benefits in moving from cash to digital transactions, and this transition is happening quickly in some emerging markets and digital payments are the first step towards digital banking. While recognisable names include Alipay and Tenpay – China’s payments duopoly – the likes of StoneCo and PagSeguro3 in Brazil also enable digital payments.
Turning to renewable energy, countries such as China and India are adopting these technologies on a massive scale. Companies in solar and wind have large numbers of potential consumers. Furthermore, China has poured billions of dollars into support for electric vehicles and leads the industry worldwide.
There are also opportunities in education companies as there is a big appetite for online education services that give children in rural areas more opportunity.

The power of engagement

Engagement is important for sourcing data from companies and helping them to improve ESG practices. We make our views known and help companies to improve performance. Say, for example, you are Coca-Cola and water is a key input. Obviously, reducing wastewater improves your income statement and increases free cash flow. Collaborating with companies helps them to achieve a double win – in terms of ESG performance and financial performance.
A lot of policy makers are taking action, setting renewable energy targets as well as introducing stewardship codes. We feel that with the right team and tools there is an opportunity to influence change and be at the forefront of change. We believe it is a great time to dive in and invest in emerging markets using an ESG strategy.
12 March 2021
Dara White & Kyle Bergacker
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

Why responsible investment has greater potential in EMs

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

20 March 2024

Krishan Selva

Client Portfolio Manager

Lin Jing Leong

Senior Sovereign Analyst, Emerging Market Asia

China: bottom-up opportunity as the macro picture slowly improves

While the top-down story has challenges, the notion that China is ‘uninvestable’ is in our view misinformed. We believe company-specific opportunities can be found by looking at trade, value for money and capital return.
Read time - 5 min
27 February 2024

Dara White

Global Head of Emerging Market Equities

Krishan Selva

Client Portfolio Manager

Cory Unal

Portfolio Analyst

India’s digital revolution offers more opportunities for investors

The country is in a structural growth cycle, with a focus on reform, infrastructure investment and manufacturing. Alongside favourable demographics, it's making India an easier country in which to do business.
Read time - 3 min
20 June 2023

Dara White

Global Head of Emerging Market Equities

Krishan Selva

Client Portfolio Manager

Indonesia - unlocking the potential

Previously vulnerable to the commodity cycle, Indonesia has witnessed an impressive resurgence with improved macroeconomic performance and attractive investment opportunities.
Read time - 6 min
24 June 2024

Melda Mergen

Global Head of Equity

Equity outlook: High valuations and higher-for-longer rates

Despite some short-term concerns, we see opportunities in stocks around the globe.
Watch time - 3 min
21 June 2024

James Coke

Fund Manager & Co-head of Institutional UK Real Estate

Emma Gullifer

Assistant Fund Manager

Green to gold: realising opportunities from the carbon transition

We explore the interventions required to monetise green energy, and how investors might benefit from the carbon transition.
Read time - 2 min
20 June 2024

Gary Smith

Client Portfolio Manager, Fixed Income

What do geopolitical risks mean for central bank FX reserves managers?

Two major industry surveys show that adjusting for geopolitical challenges will impact the way foreign exchange reserves are managed
Read time - 8 min
true
true

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.