Money management executives are particularly excited about an emerging markets-related ESG opportunity.
There has been an evolution in the impact opportunity set within emerging markets, said Simon Cooke, London-based emerging markets portfolio manager at Insight Investment, which had £213.8 billion ($257.8 billion) in fixed-income assets under management as of Dec. 31.
Emerging markets impact-related bond issuance has grown over recent years, he said, to account for 30% of total corporate supply last year, up from 20% in 2021 and 10% in 2020. In 2019, that proportion was roughly 5%, Mr. Cooke said.
That means there’s an opportunity set of more than $200 billion from issuers across 30 countries that specifically target social and environmental projects, “making your money do good rather than just (achieving) financial returns,” Mr. Cooke said. Including hard currency sovereigns, the opportunity set is more than $250 billion, he added.
Emerging markets are particularly attractive, he added, with a “greenium” of about 10 basis points every year.
“What this means is we think that, in emerging markets today … there’s an incredible opportunity to generate both financial returns and positive impact over the next three to five years, in a way that wasn’t there three to four years ago — both in terms of valuations and positive impact. It’s a great opportunity to allocate,” Mr. Cooke said.
While the world is facing increasing social and environmental challenges, such as the impact of climate change, biodiversity loss and a cost-of-living crisis, “ESG has particular relevance in EM, where many of these challenges are most acute,” said Kunjal Gala, head of global emerging markets at Federated Hermes Inc. in London.
But on the flip side, emerging markets also offer “some of the most exciting ESG opportunities, many of which are intrinsically linked” to the United Nations’ sustainable development goals, he said. “In the opportunity space, renewables and other enablers of the carbon transition will only grow in relevance as EM addresses its need to transition while capitalizing on global demand for products, services, and commodities essential for a net-zero world,” Mr. Gala added.
There are some big investment opportunities in emerging markets related to the low-carbon transition. When it comes to the corporations based in emerging markets, many “are well positioned for this transition,” said Todd McClone, London-based portfolio manager, emerging markets equities, at William Blair Investment Management, part of William Blair & Co. LLC. “Some are even global leaders in the space, especially in solar and electric vehicle batteries. We believe growth momentum and investments could accelerate in the coming years as the world seeks to reach net-zero targets.” As such, the firm has increased exposure to renewable energy and energy storage and their supply chains across portfolios, Mr. McClone added.