Using environmental, social and governance (ESG) screens for investing in emerging markets is presenting new opportunities as industries in those markets grow, according to two firms with backgrounds in the sector.
Many of the industries in China, India, Latin America, Indonesia and other emerging markets are skipping over the carbon-based development stage and starting with practices that are ESG compatible, said Rilwan Meeran, managing director of the Alternative Investment Platform at Flat World Partners, which focuses exclusively on ESG and Impact investing.
“For instance, we are seeing a lot of investments in areas such as sustainable food and agriculture practices that are responding to the growing middle class in India and China,” said Kate Starr, chief investment officer at Flat World Partners.
According to the International Monetary Fund, GDP growth in China is currently second only to the U.S., and India’s is seventh.
Although there is less transparency in business operations in emerging markets, adherence to ESG standards, including practices to combat climate change, are driven by self-interest, said Brad Harrison, managing director and advisor at Tiedemann Advisors.
“These geographic areas will be far more susceptible to sea level rise from climate change,” noted Harrison. The conditions open opportunities for ESG investing in emerging markets. “If investors are thinking about the impact they can have, they can get more bang for their buck in these emerging markets, which are poised to lead the way on environmental issues.”
For instance, China recently announced it had met its commitment to using renewable energy ahead of schedule, he said.
Another factor promoting ESG development is that companies in emerging markets are looking for capital and institutional investors are looking toward firms that have good ESG practices, Harrison said.
“Companies that abide by ESG standards are actually out performing firms that do not have good track records on these issues,” which encourages investors, Starr said.
Industries that present opportunities for investors, in addition to renewable energy and technology, are firms that contribute to increases in the local workforce in emerging markets, and companies that produce consumer goods, Meeran said.