Investors slow at ESG adoption in EMD investing
The environmental, social and governance (ESG) analysis in the emerging market debt (EMD) investing has the potential to generate enhanced alpha for investors, even though investors often discount its importance, according to Insight Investment’s research.
The research also showed that ESG analysis became an important part of credit analysis for developed market corporates, especially as part of investment grade corporate portfolios.
Additionally, according to the study, ESG analysis could help identify early warning signals that potentially enable investors to avoid ‘landmine’ investments.
In its study, Insight Investment stressed that despite the clear benefits of ESG analysis, its adoption among EDB investors was lacking as they often mistakenly saw ESG and EMD as incompatible.
“First, governance standards for emerging market corporates are perceived as being much lower than for their developed market equivalent,” the study said.
“Linked to this is the impression that because standards are intrinsically weal across emerging markets, ESG analysis is largely irrelevant because markets will not price in good or bad governance.
“Second, ESG analysis is seen as being prohibitively challenging to conduct for emerging market corporates given poor data quality, and lack of availability and disclosure of data.”
The study also proved that when comparing similar-sized corporates from the same industry in emerging and developed markets, the ESG ratings in some sectors were closer than investors expected
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