The Reality of ESG Integration in Emerging Markets Equity
Successful investing in Emerging Markets is inextricably linked to a deep understanding of Environmental, Social and Governance (ESG) factors. Developing countries are likely to face a disproportionate impact from some of the sustainability challenges facing the world today, in particular the risks associated with climate change. Yet, this is also where the most compelling investment opportunities associated with the attainment of the Paris Agreement targets and the United Nations Sustainability Development Goals (SDGs) will take place, which, over time, can be a valuable source of alpha. However, investors beware. The successful integration of ESG considerations in Emerging Markets equity investing is complex and prone to challenges, which are not always advertised. This paper exposes some of the practical challenges needing to be overcome and outlines how they have been addressed by Ashmore.
The compelling investment opportunity
Let us first consider the investment opportunity. Emerging Markets (EM) dominate the supply chains of several industries at the forefront of sustainable economic development. This is particularly the case for renewable energy and electric vehicles (EV). Ashmore assesses the opportunity and risk of a transition to a low-carbon economy through the TCFD framework, as well as appraises the significant tailwinds in industries such as those that promote financial inclusion, education provision and healthcare, amongst others.
The investment opportunity is significant. The OECD estimates that to meet net-zero emissions targets by 2050, annual clean energy investment must increase seven-fold, from USD 150bn in 2020 to over USD 1tn by 2030. The International Energy Agency believes a total transformation of the energy systems that underpin our economies is required to meet Net Zero Emissions by 2050.1 This is expected via investment in renewable energy, the digitalisation of grids and the electrification of end uses (such as transport, buildings and industry). Consequently, investors need to consider EM as an unavoidable, indeed disproportionately important, part of the sustainable economic development solution. However, successful investing in EM equity requires navigating several challenges associated with ESG implementation, which Ashmore as a specialist EM investor is well positioned to do.