Emerging markets (EMs) have a unique advantage over their developed market (DM) counterparts, according to Vanguard, in having learnt mistakes made by DMs when it comes to environmental, social and governance (ESG) factors.
In a webinar with Wellington Management, the firm responsible for Vanguard’s emerging markets strategies, it discussed the unique ESG opportunities in the region.
Not one criterion of ESG was more important than another and it depended on the specifics of the different industries.
However, they felt climate change was of particular importance in EMs due to their geographic make-up such as extreme heat, flooding and poor air quality. EMs were also at risk from changing legislation and policy affecting carbon-heavy industries such as steel production.
Jawan Parker, Welling Management director of investments – Asia, said: “ESG is not one size fits all, it is about considering which factors are most important in that industry and how you can engage with firms on that and that will differ by sector.
“EMs have also had the ability to learn from the mistakes of DMs and leapfrog those countries on those issues and now a lot are leading the way in innovation in tackling these issues.
“There is an opportunity to see strong business models in companies that have a sustainable, value-accretive way.”
Jeremy Butterworth, Welling Management vice president and portfolio adviser, added: “Climate change is pretty indiscriminate but it is affecting EMs in different geographies depending on the physical risk.
“Think about the location of the specific companies and their assets and how likely they are to be affected by climate change in the future.
“Whether you are an insurer or a real estate firm, understand the fundamentals and where the underappreciated risks are from climate change.”
Despite climate change problems, the pair felt EMs remained a viable investment opportunity for three reasons: secular growth, structural demographics and compelling valuations.
Some 60% of the global population lived in an EM country and 55% of them were aged under 34 which presented a meaningful opportunity while innovation had shifted away from manufacturing into research and development in areas such as technology, healthcare and energy.
