Posted inESG

Driving sustainability through investing in emerging markets

Investors should actively engage with companies to identify opportunities, said Schroders.
Farmers farming on rice terraces. Ban Pa Bong Piang Northern region in Mae Chaem District Chiangmai Province That has the most beautiful rice terraces in Thailand.

Due to a heavier reliance on climate-sensitive sectors such as agriculture, forestry and tourism, developing countries are more likely to be affected by negative effects of climate change than their developed country counterparts, argues Schroders

On the other hand, research by the International Energy Agency estimates that the average cost of emissions avoidance is around half the level in developed economies, making clean energy investment in these regions a potentially cost-effective way to reduce global emissions.

“By investing in sustainably run companies whose products or services help address environmental and societal challenges, our intent is to have a positive impact and advance the United Nation’s sustainable development goals while generating an attractive financial return,” said Jonathan Fletcher, emerging market fund manager and head of EM sustainability research, Schroders.

The asset manager noted that there are numerous companies in the emerging markets that are facilitators of positive environmental impact spanning across various industries.

“Manufacturers of electric vehicles (EVs), EV batteries, and renewable energy systems, including solar panels and wind energy equipment, play a direct role in the process of energy transition,” Fletcher added.

“While semiconductor manufacturers play a more indirect role, their products are an essential component in green transport such as EVs, and in improving the energy efficiency of industry.”

Those companies which are investing and contributing to the clean energy transition are forecast to see strong demand growth as the world shifts to net zero, said Schroders.

Active engagement

When investing in emerging markets, Schroders believes it is not simply by adopting a “buy-and-hold” approach to those companies, but to also consider other factors such as ESG, market competition, geopolitics, or valuations.

Investors should understand the target company’s production processes and supply chains, its impact on the environment and people, and evaluate whether the energy sources are renewable and whether working practices are of a high standard.

Schroders thinks company disclosure has never been more important for obtaining such information. While information transparency improves, investors should also help to identify where companies fall short, to engage and help to drive change.

Another benefit of active engagement in sustainable investing is to identify companies with high potential.

As there is a high level of competition across sustainable industries due to a low cost of capital and ample subsidies, ESG investors should not only invest in China given its magnitude, but also look for opportunities across a range of emerging markets, from South Korea and Taiwan through to Brazil, said the asset manager.

Part of the Mark Allen Group.