Here, we address three major misconceptions around ESG investing in the EM corporate space.
Misconception 1: The EM corporate space has limited ESG market data availability
From an investment standpoint, it is essential that reliable, timely ESG data be part of the analytical process. Market data vendors allow investors to analyze standardized data across countries, sectors and companies.
Some investors may assume that market data coverage for the emerging market universe is significantly lower than the developed universe. However, MSCI ESG Ratings, one of the industry leaders when it comes to ESG market data, has coverage for the EM corporate debt universe1 of approximately 85% as of September 2023. While the global universe2 has coverage in the mid to high 90%s, EM coverage is steadily increasing and allows for differentiation between ESG leaders and laggards.
The Task Force on Climate-Related Financial Disclosures (TCFD), created in 2015, has led efforts to enhance climate-related disclosures with the goal of bringing transparency to climate-related risks and opportunities. As such, the number of companies reporting carbon emissions has consistently increased. When looking across the EM corporate universe, carbon emissions coverage has increased almost 40% over the past five years. In fact, we find that the majority of companies in the universe are now measuring, tracking, and reporting scope 1 + 2 emissions. This rich data set allows investors to calculate reliable carbon footprint and exposure metrics. This data can be utilized to deliver lower-carbon portfolios for interested investors.
Misconception 2: EM-labeled bond issuance is a narrow opportunity set
Investors seeking to allocate capital to issuers or issues with environmental, social or governance objectives may find that green, sustainable, social and sustainability-linked bonds have a growing prominence in the universe. Year to date, as of September 2023, almost 30% of EM corporate new issuance has come in the form of a labeled bond. The opportunity set has grown 3x since 2018, as shown below.3 Regionally speaking, we see the largest labeled bond issuers out of Asia and EM Europe, with growing issuance out of the Middle East and Africa.
ESG Issuance Trends in EM Corporate Debt
Source: JP Morgan, as at 29 September 2023, GSS = Green, Social and Sustainability Bonds
Misconception 3: EM countries rely heavily on non-renewable sources for all energy
The EM universe includes a diverse set of 60 countries across five continents with different industry drivers, access to natural resources and climate goals. In addition, many EM economies are striving to balance high growth expectations with environmental goals. Due to a combination of broad-based political support, access to important natural resources and innovative green technologies, several Latin American countries have made notable efforts related to renewable energy use and, in turn, broader environmental goals.
Looking at electricity production alone, many Latin American countries source from renewables at percentages that far exceed that of the United States and European Union, as shown in the chart below. Several Latin American countries have also made notable progress in incorporating renewables in their total energy mix.
Share of Electricity Production from Renewables
Source: https://ourworldindata.org/renewable-energy Data for Paraguay, Panama and Guatemala through 31 December 2021. Data for all other countries through 31 December 2022.
Conclusion: EMD and ESG can be compatible
In our view, some investors’ perception of ESG-related opportunities in the EM corporate space falls far short of reality. We believe the asset class has sufficient market data, robust issuance and sound fundamentals for investors, whether they want to assess financial materiality or take a values-based approach to portfolio construction.
2 Bloomberg Global Aggregate; corporate is a proxy for the global universe.
3 JP Morgan Market as of August 2023.
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This content is pulled from Loomis Sayles blog post, which is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization. This information is subject to change at any time without notice. Market conditions are extremely fluid and change frequently.