Chief investment officers seek strong data to help them pick the right investments, and there’s growing evidence that applying environmental, social, and governance (ESG)
factors to emerging-market investments may lead to outperformance.
Until recently, there has been little evidence to support their use
in emerging markets. New research by index providers and other
financial institutions suggests that emerging-markets companies with
good ESG performance strongly outperform comparable companies
in developing markets. The transparency created when using ESG
factors at both a country and a company level in emerging markets is
key. ESG factors also account for a significant measure of the market
variation between frontier- and emerging-markets bond spreads (see
Fig. 1, page 36). However, “ESG use is still in its infancy, as I think
only a few investors are looking at these factors,” said Nicolas Jaquier,
emerging markets economist at Standard Life Investments, offering
those who track it a chance to outperform.
When ESG analyses are publicized in emerging markets, they
can help bring about investment-friendly cultural change, including
reduced political corruption and higher standards of living that can
produce both short- and long-term dividends in the form of reduced
uncertainty for investors and a larger retail economy, several market
“With most emerging markets, you’re dealing with a greater
degree of information asymmetry where the companies or the
government know more about what’s going on than they tell an
investor, and any degree of data that enhances transparency tends to
move a market quicker and more dramatically,” said Matt Moscardi,
head of financial-sector research for MSCI ESG Research.
So overlaying ESG as alternate data has more impact.
Cambridge Associates used data from the MSCI Emerging Markets
How ESG brings transparency
to the fastest growing markets
Reported by Debbie Carlson Art by Harry Campbell