By Tilmann Galler, Global Market Strategist, J.P. Morgan Asset Management in Frankfurt
| The case for ESG integration when investing in EM
In our 2021 Investment Outlook, we outlined that one of the key imperatives for investors in 2021 was to understand how the global policy and regulatory initiatives behind environmental, social and governance (ESG) factors are likely to increasingly affect the macro landscape and financial sustainability of companies.
In this context, should investors shy away from investing in emerging markets given lower standards?
In this piece we consider the diverse array of ESG challenges that exist in emerging markets and argue that selecting companies that are rising to the challenges and navigating a changing ESG landscape can lead to significant return opportunities, as we have already seen in recent years.
Tilmann Galler: “Emerging markets and ESG represent the place where two investment mega-trends come together. The dynamic growth of emerging markets will lead to a significantly higher representation in portfolios in the next 10 years.
At the same time, due to investor preferences and developed world capital regulation, we are seeing a growing preference for investments that meet ESG criteria. Emerging markets are not homogenous on a country nor a corporate level. But growth and sustainability can be reconciled through careful company research and engagement.
Companies that are the beneficiaries of fast growth in their local markets, but which at the same time demonstrate an awareness and desire to meet global ESG standards, have sustainable business models. Indeed, ESG characteristics often serves as a proxy for quality, since companies that screen well are often managed with a long-term view, with higher levels of broad R&D and innovation.
In summary, we do not see that investing in emerging markets sits in opposition to the world’s broader ESG ambitions – the opposite might be the case. By demanding higher ESG standards, investors are helping to accelerate the pace of change. The scope for improvement in sustainable outcomes is significant and the consideration of ESG factors in this asset class provides ample return opportunities for long-term investors.”
| This article is based on information provided by J.P. Morgan Asset Management. It is not sponsored content.
| All opinions expressed are those of the author.