ESG, or environmental, social and corporate governance issues have been a growing concern for investors over the last decade. As corporations become more aware of ESG risks, they are increasingly incorporating sustainability into their strategy. In some cases this means that companies are becoming more profitable as they address risks through ESG disclosures. In other cases there is speculation that it’s not always clear what effect ESG has on profitability. But what we do know is that the ESG market is maturing a lot quicker than expected, not unlike global warming. For investors, who want be ahead of the wave to sustainability, (ESG) impact metrics reveal that 2021 was a record year, with $120 billion invested in sustainable assets, up from $51 billion in 2020.
The world’s developing economies are increasingly important to the global economy. In fact, emerging global markets accounted for more than half of the total economic growth in 2020 and represent more than 70% of the world’s population. The future prosperity of people across the globe is closely linked to how these countries develop economically and socially, and ESG (environmental, social, governance) issues increasingly influence this development.
This paper will give you an overview of what ESG is and how it fits with emerging markets globally in order to understand how massive this market really is. But first, lets cover some basics to make sure that we are all starting from the same point.
- What are ESG markets?
- What are examples of ESG?
- What does ESG mean in business?
- What are emerging markets?
- Why is ESG important for emerging markets?
- Is it ethical to invest in emerging markets?
- What are the emerging markets of 2021?
- Why should companies do ESG?
- Why should investors demand ESG?
- What is the difference between sustainability issues and ESG?
- What are the best ESG stocks?
- Are emerging markets worth it?
- Why emerging markets ESG are attractive?
- What risks should investors be aware of?
- What ESG factors should investors consider?
- How can investors mitigate these risks?
- Why invest in emerging markets ETF?
- What are the risks of ETFs in emerging markets?
- So, should you invest in an emerging markets ETF?
- What percentage of my portfolio should be in emerging markets?
- Are Emerging Markets undervalued?
- In conclusion on your investment objective
- Caveats, disclaimers & the emerging markets index
What are ESG markets?
ESG stands for environmental, social and governance. ESG markets are investments in which the companies’ environmental, social and governance performance is taken into account when making investment decisions. It was first coined in 2001 by Bob D.Hersh, a portfolio manager at Calvert Investments when he was looking to invest has money into companies that had good environmental records and social policies.
ESG markets have come a long way from being niche investments for socially-conscious investors with specific moral values to becoming mainstream investment options globally. In fact, the total assets under management by ESG funds and ETFs had grown exponentially since 2019.
What are examples of ESG?
ESG impacts companies’ profitability positively or negatively depending on how it is implemented. Companies like Microsoft (whose former CEO Bill Gates was a major proponent of social and environmental responsibility) or Starbucks (which has been an advocate for the legalization of same-sex marriage, among other things) have increased their profits as they integrate sustainability into their operations.
What does ESG mean in business?
On the flip side we see companies like Volkswagen who were found to be rigging emissions tests in 2014 leading to decreased profitability as fines and lawsuits affected their financial performance. An example of a company with a poor social record is Monsanto which has been the target of environmental and social activism for decades. The bottom line is that if your company is not acting in a sustainable way, you can no longer hide behind the veil of ignorance or cover it up…for long. And when it comes out, it can lead to decreased profits, or in some cases, bankruptcy. And who pays for it? The shareholders. But the stakeholders also pay for it through the loss of livelihoods and tax revenue which pays for infrastructure, the effects on consumer trust and the greater impact on society at large. That always leaves someone else (the taxpayer) to clean up your mess, which proven to not be a very sustainable way to live.
What are emerging markets?
Emerging markets are countries that are experiencing rapid economic growth, particularly in developing countries. While there is no universally accepted definition of what emerging markets are, they can be roughly defined as the economies with an above-average rate of growth and a rising share of world trade (OECD, 2010). Some examples include Brazil, China, India South Africa , Mexico and Turkey .
Why is ESG important for emerging markets?
If there is one thing that Covid-19 taught us, it’s that what affects one of us affects all of us. Our economies can’t go back to “normal” because normal wasn’t sustainable. But we can move forward. And that is where emerging markets come in.
Emerging markets are critical to the global economy and they are where a lot of the growth is happening. In fact, more than half of the world’s economic growth in 2020 came from these countries. And this trend is only going to continue as developing economies become more integral to the global marketplace. And more integral to becoming sustainable.
That is why investors are scrambling to focus their portfolios on ESG in these markets. Not only is there a greater opportunity to make a positive impact, but savvy investors can see where the market is going, and it’s going to ESG. And if you are a company that is operating in, or looking to enter an emerging market, you will need to do your part to be environmentally and socially responsible. Because without it, it won’t be long before your government contracts, R&D and industry relationships dry up.
Is it ethical to invest in emerging markets?
This is a question that has been debated for many years. There are those who argue that it is not ethical to invest in emerging markets because of the poor working conditions and lack of human rights in these countries. Others argue that it is important to invest in these countries in order to help them improve their standards of living. But remember, there is a considerable amount of products from emerging markets in every American household. From chocolate to automobiles.
There are a number of factors to consider when answering this question. One is the fact that investing in emerging markets can be risky. There is a stigma that there might be a greater chance of losing money invested in these countries than there is in developed markets. But as we have seen in many cases, there is no shortage of white collar crime in the home markets. Another factor to consider is the impact of investing in Emerging Markets on the local population. In the past, this would have meant that the big guys come in, take your resources for cheap, sell them high, disappear with the profit and leave a mess. But when investment is done with ESG factors guiding the process, the “social” component ensures accountability of companies to invest in the communities they serve.
In general, I believe it is important to invest in emerging markets. These countries are growing rapidly and they can greatly benefit from capital investment.
However, it is important to consider the following:
- Do not overinvest in these countries because this could increase their debts and make them more vulnerable if there was a financial crisis in that country or region?
- Investing in one or two companies that have a good ethical track record in these countries can help to improve the overall image of investing in emerging markets.
- Make sure you are aware of the local laws and regulations in order to avoid any legal issues.
- Get a financial services company or investment advisor you can trust. They are worth the investment because there are rapidly emerging trends in these evolving markets. Having someone on your team who understands the playing field of past performance, will save you a lot time and money in your investment decision process.
What are the emerging markets of 2021?
The markets with the most potential in the developing nations for 2021 are Argentina, Brazil, Chile, Colombia, Mexico, Peru, China, India, Indonesia, Malaysia, Philippines, South Korea and Taiwan. Also keep you eye on Thailand, South Africa, Russia, Czech Republic, Hungary, Poland, Romania, Turkey, Ukraine, Bulgaria, Croatia, Latvia, and Lithuania.
Why should companies do ESG?
So, what’s the point of all this? Why should companies bother with ESG issues if they don’t have an obvious direct impact on profits? There are three main reasons:
- The first reason is that customers are increasingly looking for and demanding that companies do more than make profits, and they vote with their wallets.
- Secondly, you can improve your reputation among investors by showing them you care about ESG issues. This is especially true for companies looking to list on a new stock exchange or raise capital from institutional investors who want more than just financials before investing in a company. They want to know that you are not going to become an expensive liability.
- Finally, if your company is looking to enter emerging markets, it’s critical that you are doing socially responsible business. Eventually, it will be impossible to get any financial support without proving your ESG, because you will be too great a risk.
Why should investors demand ESG?
Investors should demand ESG from companies for a few key reasons.
- First, it’s simply the right thing to do – investors have a responsibility to ensure their money is being used in a way that is consistent with their values. Do you value the environment? Do you value how you are treated? Do you place value on the responsibility of others?
- Second, there is proven and growing evidence that investing in sustainable businesses can lead to better financial performance over the long term.
- Finally, as more and more investors demand ESG from the companies in their portfolios, it will create a competitive pressure for all companies to improve their environmental and social practices. This is good news for everyone – companies, investors, and most importantly, the planet.
What is the difference between sustainability issues and ESG?
ESG and sustainability are sometimes used interchangeably, but they’re actually different things.
ESG refers to environmental, social and governance practices of a company or organization. These concerns are often represented by the acronym “triple bottom line” (TBL) which is also frequently used as an underlying assumption that organizations should balance their financial performance with concern for people and planet, and not just focus on financial performance.
Sustainability refers to the ability of a system, organization or company to endure and thrive within its environmental context over time: for instance, how well it responds to local concerns such as environmental protection and social equity concerns; how well it sustains itself through renewable resources without depleting them; etc.
What are the best ESG stocks?
The top 100 ESG related and valued stocks include Microsoft, Linde, Accenture, J.B. Hunt, Xylem, Texas Instruments, Alexandria Real Estate Equities, Centerspace, Hologic, Flex, Tractor Supply, Chipotle, Zoetis, Gentherm and Ameriprise.
Are emerging markets worth it?
This is a common question that investors have, and it’s a valid one. After all, emerging markets can be quite volatile and present unique risks that investors need to be aware of before getting involved.
But at the same time, there are a number of reasons why investing in these markets can be so lucrative. For starters, they offer tremendous growth potential. In addition, the demographics of these countries are changing in a favorable way, and there is a lot of room for improvement when it comes to the development of infrastructure.
Ultimately, it’s up to each individual investor to decide whether or not emerging markets are right for them. But with careful due diligence, they can be an incredibly valuable part of any investment portfolio.
Why emerging markets ESG are attractive?
The attraction of emerging markets for investors is simple: They are growing faster than developed markets. The World Bank projects that the global economy would grow by 6% in 2021 and is projecting a 4.9% growth rate in 2022. That growth will be largely driven by emerging markets.
But it’s not just about fast growth. Emerging markets also offer investors opportunities for diversification, as they tend to be less correlated with developed markets.
Emerging markets also offer investors opportunities for alpha generation, as stock prices in these countries are often less efficient than those in developed markets. This is due to a number of factors, including lower liquidity and information leakage.
What risks should investors be aware of?
However, there are some risks that investors need to be aware of before investing in emerging markets.
- The first is political risk. This includes things like expropriation, changes in government policy, and social unrest.
- Another risk is liquidity risk. This refers to the fact that it can be difficult to sell assets in these countries when needed.
- Finally, there is also credit risk. This refers to the risk that an issuer will default on its debt.
One way to speed up the process is to invest in a financial manager or investment strategist, someone who is constantly working in the field and is aware of the current trends. It’s like having a coach in your corner who already knows the pitfalls and can see where the field is going.
What ESG factors should investors consider?
Investors also need to be aware of environmental, social, and corporate governance (ESG) risks in emerging markets.
For example, companies may exploit workers or damage the environment without repercussions due to weak regulations. Poor investor awareness and disclosure of ESG risks can also lead to higher investment risk.
How can investors mitigate these risks?
The best way for investors to mitigate these risks is by doing their own due diligence on the companies they are investing in. This includes assessing the quality of management, looking at environmental and social performance, and understanding the country-specific risks. Investors can also use ESG screening tools to help them identify companies with better ESG profiles.
Many investors also turn to sustainable and responsible investing (SRI) funds. These are mutual funds that screen out companies based on certain ESG criteria, such as poor environmental or labor practices. They then invest the remaining capital into other stocks that meet their screening requirements. SRI funds can be a great way for individual and institutional investors alike to gain exposure to emerging markets while mitigating some of the associated risk.
You might also want to read What does an ESG score Mean?
Why invest in emerging markets ETF?
Why not? If you know anything about an ETF, you will know that they are a brilliant way to invest in the markets. Emerging Markets ETF stands for Exchange Traded Fund, and is a collection of assets from emerging market countries. They can be traded like stocks on an exchange, this means if you believe the market value should go up or down you can buy them at one price and sell them at another. This is not possible with regular funds, so this makes ETFs very popular because you can put all your money in to one place and it will do the rest for you based on what you think about where the market value should be.
ETFs are also a great way of getting exposure to emerging markets if they are new to investing or you want a simpler way of investing without having to do much. You can just buy an ETF and leave it. The value will change over time based on what you already know about emerging markets as well as how they perform in comparison to other investments such as US companies or shares from UK stock exchanges.
One thing that makes them so popular is that emerging markets are the future of the global economy. They have been growing faster than any other region for a number of years now, and this is only going to continue. This means that if you invest in an ETF that focuses on these regions, your investment will be doing well even if the rest of the market is struggling.
What are the risks of ETFs in emerging markets?
Of course, there are some risks when it comes to investing in ETFs. As you can see from the above, there is a strong case for why people should invest in an emerging markets ETF if they want their money to grow faster than other investments such as cash. On the other hand, this does not mean that these investments will always do well and it is important that you research the markets before making any decisions.
One thing to remember is that when it comes to ETFs, they are not as diversified as regular mutual funds. This means that if something happens in one of the countries included in the fund, your investment could go down. For this reason, it is important to make sure you understand the risks involved before investing.
So, should you invest in an emerging markets ETF?
It depends on what your goals are and how much risk you are willing to take. If you want your money to grow faster than other investments, then yes it is a good idea. However, make sure you do your research first! Or enlist the advice of someone who understands how ETFs work in emerging markets.
What percentage of my portfolio should be in emerging markets?
A good question, because diversifying investments is very important to every portfolio.When it comes to emerging markets, it depends on your risk tolerance.
Investing in emerging markets can mean investing in smaller companies with less transparency and more volatility than the blue-chip stocks you know (and maybe love).
Keep this in mind when deciding how much of your portfolio to invest in emerging markets. If you’re young, have a long time horizon, and are comfortable with more risk, you can invest up to 60 percent of your portfolio in emerging markets. If not, stick with 20-30 percent at most.
Additionally, many investors choose to add an Emerging Markets ETF or mutual fund as part of their diversified portfolios. These funds give you broad exposure to a variety of companies in different countries, so you don’t have to do all the research yourself.
When it comes to ESG and emerging markets, remember that each country has its own set of environmental, social, and governance (ESG) issues. You’ll want to be aware of these before you invest to ensure that you’re comfortable with the risks involved.
For example, investing in a Chinese company might mean investing in a state-owned enterprise (SOE), which can have different ESG issues than a privately-held company. Make sure you know what you’re getting into before you invest!
Are Emerging Markets undervalued?
ESG and Emerging Markets in the Global Economy. A recent article suggests that emerging markets are undervalued and present a compelling investment opportunity. The report, which is based on an analysis of more than 700 companies across 48 countries, finds that while EM stocks have underperformed global equities this year, they offer attractive valuations and strong earnings growth prospects.
ESG issues are also receiving greater attention in emerging markets, with recent initiatives such as the creation of an ESG committee at the Korea Exchange highlighting this trend. The report cites a survey by Sustainalytics which found that 72% of EM equities have some form of embedded sustainability risks or opportunities in their business models.
Emerging markets offer compelling investment opportunities, with attractive valuations and strong earnings growth prospects. ESG issues are also receiving greater attention in these markets, with recent initiatives such as the creation of an ESG committee at the Korea Exchange highlighting this trend.
In conclusion on your investment objective
In conclusion, while emerging markets offer compelling investment opportunities, it’s important to remember that ESG issues are also receiving greater attention in these markets. With recent initiatives such as the creation of an ESG committee at the Korea Exchange highlighting this trend, investing in emerging markets can be a great way to diversify your portfolio while taking advantage of strong earnings growth prospects and valuations.
Caveats, disclaimers & the emerging markets index
At ESG | The Report, (Holistic Approach) we believe that we can help make the world a more sustainable place through the power of education. We have covered many topics in this article and want to be clear that any reference to, or mention of fund documentation, future performance of market conditions, health crisis, business ethics, latin america, asset managers, tax advice, adversely affect, market price, fund’s performance for long term investors, fossil fuels, iron ore, green bonds, brokerage commissions, social risks, other factors, so called, pay attention, important disclosures, third party sources, not nav, company, individually redeemed, sources believed or personal data in the context of this article is purely for informational purposes and not to be misconstrued as investment or any other legal advice or an endorsement of any particular company or service for your investment objectives. Neither ESG | The Report, it’s contributors or their respective companies or any of its members gives any warranty with respect to the information herein, and shall have no responsibility for any decisions made, or action taken or not taken which relates to matters covered by ESG | The Report. As with any investment, we highly recommend that you do your homework in advance of making any moves in the stock market. Thank you for reading, and we hope that you found this article useful in your quest to understand ESG and sustainable business practices. We look forward to living together in a sustainable world with you.
Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for professionals focusing on ESG principles. Their primary goal is to provide resources to help middle market companies, SMEs and SMBs transition to a more sustainable future.