News and articles

Time for emerging markets to go green

Green bamboo

For financial professionals only

It’s no secret that emerging economies are driving global economic growth, led by their favourable demographics.  For investors who can tolerate a degree of volatility, the potential long-term rewards from allocating part of a portfolio to emerging markets can be attractive. But how do emerging markets stack up for sustainable investors?

Setting the bar high

The United Nations Sustainable Development Goals (UN SDGs) provide a useful framework for investors.  It’s estimated that $5-7trn a year will be required achieve these goals by 2030, with much of this directed towards emerging markets to improve access to clean water, energy, healthcare and education.  Sustainable investing therefore represents a big opportunity in emerging markets.

Working in tandem to reduce carbon footprint

Global warming is caused by greenhouse gases, mainly carbon dioxide. As shown in the chart below, China is the biggest emitter, responsible for around 28% of global carbon emissions.  Three of the top five emitting countries are emerging economies.  While we, in developed economies, have the highest carbon emissions per person, and need to make the biggest changes as individuals to reduce our carbon footprint, it will be crucial for emerging economies to play their part in limiting global warming to sustainable levels.

Chart 1:  Global carbon emissions by country, 2019, source: UCS USA

Pie chart showing the global carbon emissions by country

Optimism in abundance

There are many reasons for feeling optimistic about emerging markets transitioning to a low carbon world.  India is leading in its progress against its Paris Climate Agreement targets, and in October 2020 China unexpectedly committed to net zero carbon emissions by 2060.  This is behind the commitments made by Europe and the US to reach net zero by 2050 but is nevertheless an important acknowledgement of the need to de-carbonise by the world’s second largest economy.

China is also the global leader in renewable energy investment as shown in Chart 2.  The Shanghai and Shenzhen stock exchanges are part of the sustainable stock exchanges initiative and recently provided further guidance for companies on ESG reporting.

Chart 2:  Renewable energy investment by country ($bn) in 2019, source:  statistica.com

Bar chart showing the global renewable energy investment by country in 2019

There is plenty of evidence to show that emerging markets are committed to doing the right thing. Indeed, the number of emerging market signatories for the UN Principles for Responsible Investment (PRI) increased by 50% in 2020. Chart 3 shows there’s been a rise in sustainable fund assets across Asia and Emerging Markets, with significant headroom for growth before it approaches anything near the levels seen in Europe and the US.

Chart 3: Sustainable fund assets ($bn), source: Morningstar

Bar chart showing growth of sustainable fund assets between Q4 2017 and Q3 2020

More needs to be done…by working together

Sustainable investing is an evolving theme, but more needs to be done in emerging markets to drive these initiatives.  There have been some setbacks due to the disruption caused by the COVID-19 pandemic, with environmental regulations being relaxed in India and China for example. Governance and transparency can also be a challenge in emerging markets.

When we speak with our fund managers in this space, we understand that engagement with companies is a long-term process.  It’s necessary to respect the local culture, attitudes and regulations. On the whole though, our fund managers are finding that companies in emerging markets are increasingly receptive to engagement on a variety of sustainable issues, and more willing to improve their disclosure around carbon emissions and use of resources.  Through working together, it’s possible to make a more sustainable world.