EM Corporates & ESG: A Surprisingly Strong Opportunity Set

Growing at a cumulative rate of over 300% since 2010, emerging markets (EM) corporates represent a robust and diverse asset class, currently worth more than $2.5 trillion. While investors are often drawn to the asset class for a variety of reasons, including the potential for diversification benefits or attractive yields, many perceive the entire EM corporate asset class as being at odds with ESG investing. For example, some may think EM corporates largely lack the ESG market data needed to thoroughly assess the financial materiality of E, S or G factors. Investors who wish to express environmental or other values in their portfolios may believe the practices of EM corporate issuers (or their home countries) are incongruous with that approach. We believe these perceptions reflect an antiquated view of the asset class. Based on our assessment, EM corporates are equipped to help investors meet a range of ESG-related objectives.

Here, we address three major misconceptions around ESG investing in the EM corporate space. 

Misconception 1: The EM corporate space has limited ESG market data availability

From an investment standpoint, it is essential that reliable, timely ESG data be part of the analytical process. Market data vendors allow investors to analyze standardized data across countries, sectors and companies.

Some investors may assume that market data coverage for the emerging market universe is significantly lower than the developed universe. However, MSCI ESG Ratings, one of the industry leaders when it comes to ESG market data, has coverage for the EM corporate debt universe[1] of approximately 85% as of September 2023. While the global universe[2] has coverage in the mid to high 90%s, EM coverage is steadily increasing and allows for differentiation between ESG leaders and laggards.

The Task Force on Climate-Related Financial Disclosures (TCFD), created in 2015, has led efforts to enhance climate-related disclosures with the goal of bringing transparency to climate-related risks and opportunities. As such, the number of companies reporting carbon emissions has consistently increased. When looking across the EM corporate universe, carbon emissions coverage has increased almost 40% over the past five years. In fact, we find that the majority of companies in the universe are now measuring, tracking, and reporting scope 1 + 2 emissions. This rich data set allows investors to calculate reliable carbon footprint and exposure metrics. This data can be utilized to deliver lower-carbon portfolios for interested investors.

Misconception 2: EM-labeled bond issuance is a narrow opportunity set

Investors seeking to allocate capital to issuers or issues with environmental, social or governance objectives may find that green, sustainable, social and sustainability-linked bonds have a growing prominence in the universe. Year to date, as of September 2023, almost 30% of EM corporate new issuance has come in the form of a labeled bond. The opportunity set has grown 3x since 2018, as shown below.[3] Regionally speaking, we see the largest labeled bond issuers out of Asia and EM Europe, with growing issuance out of the Middle East and Africa.

Issuance in line with the International Capital Market Association requires standardized reporting, which provides investors access to ESG frameworks, allocation and impact reports with second-party opinions and third-party verification. While due diligence in the space is required, we believe it presents interested investors with a potentially attractive opportunity to direct capital to specific ESG objectives.

Misconception 3: EM countries rely heavily on non-renewable sources for all energy

The EM universe includes a diverse set of 60 countries across five continents with different industry drivers, access to natural resources and climate goals. In addition, many EM economies are striving to balance high growth expectations with environmental goals. Due to a combination of broad-based political support, access to important natural resources and innovative green technologies, several Latin American countries have made notable efforts related to renewable energy use and, in turn, broader environmental goals.

Looking at electricity production alone, many Latin American countries source from renewables at percentages that far exceed that of the United States and European Union, as shown in the chart below. Several Latin American countries have also made notable progress in incorporating renewables in their total energy mix.

Chile’s renewable energy efforts are notable among Latin American peers. Its share of electric production from renewables has increased by 22% in the past 10 years. Despite Chile’s historical ties to copper mining, it has an ambitious goal of converting 70% of total energy consumption to renewables by 2030. The country’s environmental efforts have enjoyed broad political and public support, with the country issuing its first energy transition strategy in December 2021. Following the Chilean Coal Commission’s first meeting in June 2018, then-President Sebastián Piñera announced the start of the phase out by 2024, with the ultimate goal of closing all coal plants by 2040. The country’s environmental efforts can serve as an example for others.

Conclusion: EMD and ESG can be compatible

In our view, some investors’ perception of ESG-related opportunities in the EM corporate space falls far short of reality. We believe the asset class has sufficient market data, robust issuance and sound fundamentals for investors, whether they want to assess financial materiality or take a values-based approach to portfolio construction.

[1] Emerging Market corporate debt universe is JP Morgan CEMBI Broad Diversified.

[2] Bloomberg Global Aggregate; corporate is a proxy for the global universe.

[3] JP Morgan Market as of August 2023.

MALR032087