EMs, climate and the development tightrope

ESG sustainable investing net zero responsible investment India emerging markets

26 September 2023
| By Rhea Nath |
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Emerging markets (EMs) have announced ambitious net-zero targets in keeping with their global peers, but unlike these developed markets, they face added challenges around investing in their own national development goals. 

Presently, countries like the United States and Australia have committed to net-zero goals of no later than 2050 while China and Indonesia are aiming to reach their targets by 2060. 

India, the third-largest emitter of greenhouse gases behind China and the US, has a longer timeline, pledging to cut its emissions by 2070, two decades after most developed markets.

To naysayers of this timeline, Praveen Jagwani, chief executive of UTI International, highlights that it could be interpreted as racist or unfair to expect European standard climate commitments from India right away.

“On climate change and the environment, India is taking a very strong stance, particularly when it comes to solar power. But here’s the thing – the developed world became developed by exploiting natural resources without any concern for climate,” he told Money Management.

“The average person in, say, Europe, is able to afford their lifestyle, heating in the winter, great public transport, social security, because their ancestors punished earth mercilessly. In India, roughly one-sixth of the population is still impoverished, unable to afford three square meals a day.

“One argument could be, why should India commit to Western standards of climate change and carbon emissions? We owe our people electricity, clean drinking water, a decent education, all the UN sustainable development goals.”

Having said that, the executive notes India has made some “very bold” commitments, including signing up for the United Nations Principles for Responsible Investment (UN PRI) and implementing a national stewardship code that commenced in July 2020. 

“India is fairly committed, but it is going to be a long-haul process because its first responsibility is towards its own citizens,” Jagwani observed.

“When it comes to climate, geographical borders make no sense, and to that extent, India has shown tremendous statesmanship.”

He added: “There’s no reason why Times Square should have its light on all night when it could power some 200 Indian villages a month.”

Sashi Reddy, portfolio manager at Stewart Investors and lead manager of the Worldwide Leaders Sustainability strategy, agrees that emerging economies need to forge their own developmental path.

“We will need five or six planets if everyone in India and China lived like people in the US do. Society unfortunately does not have the time for debates on who pays the bills,” Reddy said.

Continuing, he said: “In this context, we have always believed that emerging economies need to forge a different developmental path to that of the West. Thanks to technology advancements, this is already happening in areas such as mobile telephony, mobility and retail. It is then incumbent on nations to collaborate and rapidly steer our development firmly on a greener path. 

“There will be give and take involved but that is best left to the Byzantine world of policymakers and governments. It is important that all governments understand the importance of the challenge at hand, and we believe they mostly do.”

He adds that improving the lives of people is at the heart of the sustainable development challenge for any economy, and addressing these challenges is not in conflict with broader climate agendas. 

“These are complex problems with complex solutions. However, we have confidence in the power of technology and in humans’ ability to solve many of these problems. 

“Regulations can certainly help society in accelerating some of these journeys but every nation will have different political and socio-economic constraints. While they might pursue slightly different approaches, move at slightly different speeds, we believe they will all mostly head in the same direction,” Reddy said.  

Will Main, portfolio manager, Asia and emerging markets at Maple-Brown Abbott, emphasises that climate commitments and sustainability approaches vary widely in the diverse bucket of emerging markets. Even Goldman Sachs’ “Next Eleven”, the 11 nations identified as having a high potential of becoming the world’s largest economies in the 21st century, have significant differences in their demographic and economic drivers. 

Since its first prediction in 2005, the investment bank has identified that China, Brazil, India, Indonesia and the Philippines appear to be performing best.

Meanwhile, Bangladesh, Egypt, Korea, Nigeria, Turkey and Vietnam form a second group of countries that have performed broadly in line with expectations.

In contrast, Iran, Mexico, Pakistan and Russia need improvement.

“ESG in emerging markets can be complex due to the huge range of factors, and levels of disclosure, prevalent across countries and regions. We believe that by allocating capital to companies in developing nations that are in need of economic advancement, there is the opportunity to benefit numerous stakeholders, and that an ESG-integrated approach comes into its own in these markets,” Main told Money Management.

“That is not to say that we believe in profit at any cost. There are minimum standards that we expect from any company and would not tolerate human rights abuses or violations of global business norms, such as those detailed in the UN Global Compact principles.”

Under the firm’s ESG-integrated approach, he explains it is not allocating or withholding capital based on whether the country that a company operates in is meeting a pre-defined environmental or social standard. 

Any ESG assessment needs to consider the policy and regulatory settings as well as cultural sensitivities and norms of the country or region it is in, he said. 

“With respect to India, the government has a commitment to achieve net zero by 2070 and so we would assess an Indian company against its alignment to this target rather than hold it to a higher account that may be relevant for a company operating in a different jurisdiction.

“Similarly, we would not expect a minimum 30 per cent gender diversity target for a Saudi board today, however we would want to understand how that board is responding to the Saudi Arabia sovereign goal of increasing women’s participation in the workforce from 22 per cent to 30 per cent by 2030.” 

Main states that ESG provides a framework to assess a company’s material ESG risks and opportunities, an assessment of which is intrinsically tied to the jurisdictions in which a company operates. 

He said: “Understanding the local context is key in this regard – including, for example, the political and regulatory landscape, specific environmental vulnerabilities and risks, and social constructs. Where we do identify material ESG risks, we seek to engage with the company to improve conditions or reduce negative externalities, rather than exiting a position and cutting off capital.” 

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