The key challenge to investing in emerging markets is the lack of environmental, social and corporate governance (ESG) disclosure, say seven out of ten major asset managers and institutional investors collectively representing $130 billion of emerging market investments.
That is the main finding of a new survey from the Emerging Markets Disclosure (EMD) Project, an international coalition of investors and organizations working to improve sustainability disclosure by companies in emerging markets.
The survey shows that at a time when increasing numbers of institutional investors are demanding more openness and transparency, poor ESG disclosure by emerging market companies threatens to undermine investor confidence and could potentially reduce investment allocations to emerging markets.
Survey respondents commended two emerging market countries-Brazil and South Africa-for having made the most progress toward greater ESG disclosure. Both countries have developed a sustainability index to which their listed companies can aspire through improved disclosure. The full survey findings report were released June 25 in New York City at the Integrating ESG into Portfolios conference sponsored by Responsible Investor and the Social Investment Forum.
Brazil was the top country allocation and Petrobras (Brazil) was the top emerging-market holding for investors who responded to the survey. The top five country allocations after Brazil were China, India, Mexico and South Korea, respectively. The top ten individual company holdings were Petrobras, (Brazil), Samsung Electronics (South Korea), China Mobile (China), Taiwan Semiconductor (Taiwan), Teva (Israel), Vale Do Rio Doce (Brazil), America Movil (Mexico), Gazprom (Russia), Posco (Korea), and Ambev (Brazil).
Improved corporate disclosure on ESG issues could persuade more responsible investors to increase their allocation to emerging markets, the survey found.
Other key findings include:
Europeans' allocation to emerging markets is nearly double that of North Americans in the sample.
Europeans are also much more likely to focus on corporate governance criteria and corruption issues within their responsible investment approach, while North Americans favor negative screening (e.g. screening out tobacco producers, divesting from Sudan).
Three-quarters of respondents are members of at least one organization devoted to corporate social responsibility or responsible investing issues, most commonly the UN Principles for Responsible Investment.