Asset managers interested in socially responsible investments are quick to admit that environmental, social and governance (ESG) problems often run deeper in emerging markets. Corporate transparency and disclosure tends to be weaker there, and it's challenging to master the nuances of each market. But investors also tell you they wouldn't miss this opportunity for the world.

Sustainable investing in emerging markets has grown to more than $300 billion, estimates a survey of emerging market equity managers conducted by Mercer LLC in 2009. This includes assets in either a sustainable investing-labeled fund or a mainstream fund that has made some commitment to integrate ESG into its core investment process.

Trillium Asset Management Corp., which is solely devoted to sustainable and responsible investing, purchased its first emerging market stock five or six years ago. It's currently doing a thorough review of emerging markets, developing an emerging market strategy and considering the rollout of an emerging market socially screened fund, says chief investment officer Stephanie Leighton.

"We want to go where the growth is," says Leighton, who is also a co-portfolio manager of the Green Century Balanced Fund subadvised by Trillium.

By 2017, emerging markets are expected to account for 50% of world gross domestic product (GDP), according to J.P. Morgan's 2010 report, EM Moves into the Mainstream as an Asset Class. Goldman Sachs Global ECS Research has estimated emerging markets could reach 55% of global market capitalization by 2030.

International stocks already account for 10% to 15% of the assets held by Trillium and the Green Century fund, and clients are asking for more non-U.S. exposure, says Leighton. While she and her colleagues won't invest in major abusers of the environment or human rights, "We probably need to loosen up a little on ESG," since emerging markets are in the earlier stages of the process, she says.

Leighton, who is also Trillium's bank analyst, says Brazilian banks look attractive right now, particularly Banco Bradesco SA (which trades on the New York Stock Exchange as BBD). Of the BRIC countries (Brazil, Russia, India and China), Brazil has the strongest ESG practices. The banking sector should benefit from the country's strong economy, inflation that's in check and a population that is still largely under-banked.

Banco Bradesco, one of the largest private-sector banks in Brazil, has traditionally focused on low- and middle-income earners-a rapidly growing segment of the country's population. A leader in ESG due diligence among its emerging market bank peers, it has told Trillium that it's taking measures to monitor the socio-environmental risks associated with the projects it finances, including hydroelectric plants. Trillium notes, though, that it has a long way to go to be a global leader in sustainability.

India's HDFC Bank Ltd. (NYSE: HDB), Trillium's initial emerging market purchase, is experiencing annual earnings growth of 30% as more of the population becomes middle class and purchases homes. Analysts predict this growth will continue over the next three to five years, notes Leighton. HDFC, which has sponsored school and water projects, received the Economic Times Corporate Citizen of the Year award in 2005 for its longtime commitment to community development.

Although India in general offers big growth opportunities, "it's not a slam dunk," Leighton cautions. Investors should consider inflation, poverty and differences in information and customs when evaluating specific companies.

Despite significant ESG challenges in China, including human rights abuses, "we've concluded we have to be there," says Leighton. The Green Century Balanced Fund owns China's Suntech Power Holdings Co. Ltd. (NYSE: STP), the world's largest producer of solar panels.

Trillium is also interested in indirect plays in China, including Starwood Hotels and Resorts Worldwide (NYSE: HOT). The company plans to operate more than 100 hotels in China by the end of 2012, and China is already its second-largest market after North America. Starwood has been an industry leader in implementing energy-efficient technologies.

"Not engaging emerging market opportunities would leave a hole in our strategy," says Lauren Compere, director of shareholder engagement at Boston Common Asset Management. The firm, which specializes in sustainable and responsible investing, introduced a designated allocation of up to 20% in emerging markets back in 2003. "We're often bumping up against that," she says.

One emerging market company Boston Common likes is New Oriental Education & Technology Group (NYSE: EDU), the largest provider of private educational services in China. It offers English classes and other educational opportunities that help workers move up the economic ladder. South Africa-based Standard Bank Group, which Boston Common purchased off the Johannesburg Stock Exchange, focuses on lending to black small and medium enterprises (BSMEs) and black agricultural entities. It's also a leader in banking technology, including mobile phone banking.

Another Boston Common favorite is Gafisa SA (NYSE: GFA), a leading Brazilian homebuilder. Last year, it announced that 45% of its projects met the criteria for the Brazilian government's low-income-housing plan to build 1 million lower priced homes over the next two and a half years. The plan also addresses environmental and community issues in its project design.

To really begin to understand how to engage emerging markets on ESG issues, several years ago Compere toured Hong Kong, China and Korea, where she met with companies and stakeholders. She also co-chairs the Emerging Markets Disclosure Project (EMDP), an international coalition of investors and organizations working since 2008 to assess and improve ESG reporting in emerging markets.

The EMDP, which focuses on education, awareness and engagement, has targeted outreach and engagement with companies in Brazil, South Africa, India, Indonesia and South Korea. After Brazil, South Africa has made the most progress toward greater ESG disclosure.

Compere likes to remind herself that action precedes disclosure. Some emerging market companies are already thinking two to three steps ahead on ESG issues even if it hasn't made it to their sustainability reports, she says.

Ivka Kalus-Bystricky, who manages the sustainable investment-oriented Pax World International Fund, says about 12% of her portfolio is invested in emerging market companies. A big focus right now is Turkey. "It's the link between the West and the East, [and] its economy is on the right part of the S curve," she says.

Turkey has been more of a democracy in recent years, its inflation rate (between 5% and 6%) is very good given its history, its young population has exploded (30% of its 70 million people are now under the age of 30), its cheap labor and geographical proximity make it an attractive manufacturing spot for Europe, and it can work with the Middle East, she says. She also thinks Turkey will be involved in rebuilding Iraq and Egypt.

Kalus-Bystricky likes Halkbank, which trades on the Istanbul Stock Exchange, because of its relatively high return on assets, attractive price-to-book ratio and good dividend yield, among other things.

She also likes Brazil for its strong growth, political stability and growing middle class. One of Pax World's holdings is cosmetics maker Natura Cosmeticos SA, which trades on the Brazilian exchange. Analysts expect the company's annual earnings growth to jump from 11% to 17% as economic growth picks up, she says. She also notes the company's high brand recognition, its use of natural ingredients and its direct sales model, which generally involves women selling products to other women in the workplace.

Another company she likes is CCR Group, also traded on the Brazilian exchange. This infrastructure leader, which builds bridges and roads, has won accolades for strong corporate governance practices. 

While Kalus-Bystricky focuses on investment fundamentals, Julie Fox Gorte, Pax World Management's senior vice president of sustainable investing, closely examines ESG criteria, using it to approve or disapprove investments. Pax World analyzes the same criteria for all markets and doesn't look at emerging markets differently, says Gorte. What is important is how emerging market companies compare to their peers on local and regional issues, she says.

Gorte describes ESG reporting in emerging markets, as "kind of a rag bag." While Brazil is the clear leader among the BRICs, India has a strong sense and awareness, Russia has almost nothing with ESG, and China's companies "are all over the map," she says.

Investors need to go into emerging markets with their eyes open. These markets pose risks that could hurt not only emerging market companies but also developed market companies operating in these countries, says Noel Friedman, product manager for MSCI ESG Research. The good news is that investors can understand many of the risks even without company disclosure, he says.

MSCI, which participated in the original research for the Emerging Markets Disclosure Project, is examining how bribery and instability affect the natural resource sectors, how strained water supplies in many emerging market countries can affect various industries, including beverages and steel, and how sourcing from conflict zones may affect electronics and consumer products businesses. MSCI is also researching risks for insurance, apparel and high-tech companies in emerging markets, says Friedman.

Insurance premiums contain a higher probability for loss of payouts given geophysical risk from climate change and the big demographic shift to cities (because of more pollution and health problems), says Friedman. Apparel companies with human rights issues may see consumers defect to comparable brands. High-tech companies who rely on a highly skilled workforce must manage human rights, safety and employee satisfaction problems to avoid product delays.