Sustainable strategies win over sceptical emerging stock investors

Dec 11 2013, 23:35 IST
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The number of different terms used to describe it tends to add to the definition confusion. The number of different terms used to describe it tends to add to the definition confusion.
SummaryThe number of different terms used to describe it tends to add to the definition confusion.

Cajoled by developed world governments and shocked by disasters such as the Bangladesh factory fire, investors in emerging market companies are looking more closely at environmental, social or governance issues before they buy.

Once the preserve of religious and ethically minded funds and the development finance arms of major economies, these ESG themes have moved into the mainstream.

Almost all emerging fund managers in a survey by UK development finance arm CDC to be published this week consider ESG to be integral to their investment strategy, and in many deals they regard it as a "fact of life".

It is a sharp contrast to a few years ago, when emerging market investors saw sustainable strategies as an irritant imposed by worthy multilateral lenders, or "the dead hand of eco-fascism", according to CDC's ESG director Mark Eckstein.

The global financial crisis showed that companies needed to have strong governance to be financially sustainable.

And disasters such as the fatal Rana Plaza garment factory fire in Bangladesh this year illustrate the importance of social considerations such as health and safety procedures.

"We are beginning to see questions from investors such as 'Is this company going to be in business in five years' time?'," said Eckstein.

"There is a step up in investors' sophistication - they are taking ESG seriously because it is an issue for them."

CDC's own investments include Halonix, an Indian firm that makes halogen bulbs for cars, and a steel plant in Kenya with a strong health and safety policy.

Sustainable investing has mushroomed. Such assets under management in Europe jumped to over $8 trillion in 2010 from next to nothing in 2005, according to HSBC, and total about $3 trillion in the United States.

But the strategy is seen as particularly likely to reap returns in emerging stocks - even though some market participants remain unsure of the consistency of returns.

"Especially in emerging markets, governance matters," said Gary Greenberg, head of global emerging markets at Hermes.

"We are past the point when you can hide the pollution or bad practice."

Hermes runs an emerging equity fund for U.S. ethical investment fund Calvert Investments. The fund has seen an 11.6 percent return this year before sales charges, compared with a 4.7 percent fall in the MSCI emerging stocks index.

MUDDLED DEFINITIONS

Investing in a way that removes ESG risks could boost returns in an emerging equity portfolio by up to 50 basis points, according to a 2011 study by Allianz Global Investors, with

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