Even as some investors breathe a sigh of relief at the comparative stability of a Joe Biden Presidency, there are still numerous socio-political hurdles that have to be faced in mature markets.
The closure of the Brexit transition period, for example, looms large, and it seems increasingly unlikely that the EU and UK can clinch a deal to allow companies to trade without customs checks. Additionally, many prominent companies have moved or shifted operations to Europe in an effort to avoid the Brexit chaos. That’s to say nothing of the havoc Donald Trump might wreak in his final days in office.
In other words, traditionally stable markets represent a minefield of risk and speculation. Given that, where should they turn instead?
Right now, certain investment opportunities in emerging markets offer greater clarity than a lot of those in the UK and EU right now, and many businesses are on the hunt for private equity. In fact, improvements in transparency, economic, political, and social sustainability mean that companies in Africa may be more attractive. That’s particularly true of companies that are aligned to ESG commitments.
A strong track record
Given the comparative maturity of European and US companies, you’d expect that they’d be miles ahead of their emerging market counterparts when it comes to ESG implementation. That’s far from being a universal truth, however.
Morningstar’s 2018 Sustainability Atlas, for instance, found that companies in emerging markets such as Colombia, Hungary, Taiwan and South Africa outscored major developed market players such as the US when it came to ESG implementation.
While there are numerous reasons for these countries doing better – including having younger populations and greater first-hand experience of the effects of climate change – the report shows that the appetite for ESG in emerging markets is at least as big as it is in the developed world. Any ESG investor that’s as interested in implementation as they are in returns should not, therefore, be afraid to embrace emerging markets.
Following industry leaders
In fact, they might not have much choice if they want to remain competitive. In October, the $1.5-billion Candriam SRI Bond Emerging Markets Fund pulled out of Russia, China and Saudi Arabia because the three countries score too low in its ratings for environmental, social and governance risks.
It’s worth bearing in mind that this isn’t a dedicated ESG fund, but one which uses ESG’s components in its investment weighting. Given that it is also a fund which has outperformed 90% of its peers over the past three years, it’s likely that such practices will increasingly become the norm.
Emerging market countries which rely on foreign debt investments will have taken note. And with funding needed more than ever in the wake of Covid-19’s economic devastation, they’re much more likely to comply with investor demands. In fact, without the economic reserves of wealthier developed countries, they may well start performing even better when it comes to ESG compliance.
As such, ESG investors will likely see an increased number of opportunities in emerging markets, potentially making them more fertile ground than developed markets.
Understanding the risks and rewards
Of course, there are still risks associated with investing in emerging markets companies. There always will be. But, as market reactions to the second wave of Covid-19 sweeping across Europe show, there are risks in developed markets too.
Amidst the current socio-political turmoil, many of those markets are about to enter into a period of increased unpredictability. The risks in many emerging markets are, by comparison, well known and understood. Investors can therefore mitigate for them.
Additionally, just as ESG funds have generally beaten the market over the past few years, so emerging market ESG funds are beating general emerging market funds. The exchange rate in many of these countries also means that UK-based investors can reap those returns for comparatively low levels of investment.
With sufficient research, therefore, there’s no reason why investors concerned by European and US politics shouldn’t put their money into emerging market companies.
