Factoring in of environmental, social & governance (ESG) issues in investment decisions for emerging market equities continues to make inroads into mainstream investment practices despite the financial crisis, says a recent report of the International Finance Corporation, titled Sustainable investments in emerging markets: Unscathed by the financial crisis. It provides a ?before and after? snapshot of mainstream investor opinion on sustainability issues in emerging market equity investment, comparing pre-crisis (2007) and mid-crisis (2009) attitudes.

The report, surveying the attitudes of corporate executives and investment professionals, found that 46% of asset owners, one of the most influential participants in the investment value chain, strongly agreed with the statement ?ESG issues are an important part of our research, portfolio management and manager selection? in 2009, up from 36% in 2007. And 78% of asset owners thought that the importance of ESG factors has been amplified by the crisis and will result in greater use of ESG criteria over time.

The group that is least committed to sustainable investment practices is asset managers, where 11% disagree with the statement that ESG factors are an important part of the investment process, and 8% say that ESG criteria will not become important over the next three years. Yet, among asset managers, 75% say that sustainable practices are an important facet of choosing investments, and an even higher proportion thinks that these practices will become more important over 2009-12 period.

Asset owners ranked ?investment or business merit? far ahead of other motives for sustainable investing in 2009, suggesting that sustainable investing criteria are less a matter of fulfilling compliance mandates than an aid to choosing strong investments. In the 2007 survey, asset owners ranked ?regulatory and compliance considerations? ahead of other motives.

However, emerging market companies ranked their motivations differently. The rankings in 2007 and 2009 were almost identical, and in both years ?regulatory and compliance considerations? ranked first.

The ranking of obstacles to sustainable investing didn?t change much between the sunny days of 2007 and the bleaker ones of 2009. But significantly fewer asset owners ranked transparency as one of the top obstacles in 2009. The 2009 survey reinforced the need to take climate change into account when evaluating investments. Most asset owners and funds managers (86% of both groups) believe that it will have a significant effect on their emerging markets portfolios. Moreover, 60% of asset owners and 62% of money managers say that this effect will be felt within the next five years.

Further the survey also found that the links between ESG performance and long-term investment performance has increased over time. In the 2007 survey, just under half of the asset owners say the link is strong; in the 2009 survey, 63% said the link is strong.

The story was much the same for emerging market companies except for that a higher proportion of the respondents in the 2009 survey say the link between ESG actions and stock price performance is strong, while a lower proportion says the link is weak or that there is no link at all. Only in the case of asset managers was there a little change between 2007 and 2009 attitudes. But even here, over half of the 2009 respondents say the link is strong.

In both surveys, asset owners and fund managers noted the growing importance of ESG criteria in emerging markets; they also expect increased demand for emerging market investment products over the next three years. Among publicly traded companies headquartered in emerging markets, there is a high level of awareness of sustainable criteria.

In sum, the investment community continues to see the use of sustainable investment criteria in emerging markets as both mainstream and persistent, even after the value of their portfolios has shrunk. And emerging market corporate issuers continue to see sustainable practices as important to the investors who provide funding. Investors who neglect these sustainability criteria run the risk of missing opportunities to make a profit, while companies that fail to build sustainable operations may end up paying too much for capita.

The report ends with a number of suggestions for strengthening the adoption of sustainable investment strategies in emerging economies. The most important among them are the improved disclosure, increase in securities research, better regulations, greater focus on opportunities, better nurturing of next generation of managers and investors and building new capacity and capabilities in investment analysis.