Why responsible investment has greater potential in EMs (Columbia Threadneedle)

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by Dara White, Global Head of Emerging Market Equities, and Kyle Bergacker, Senior Thematic Investment Analyst, Responsible Investment at Columbia Threadneedle Investments

With more room for businesses to improve their environmental, social and governance credentials comes greater potential alpha generation, making company selection and data analysis key

The emerging markets universe has 26 countries and, arguably, environmental, social and governance (ESG) issues matter far more in these regions than in developed markets. There is more room for companies to improve and for investors to influence change, for the good of society and investors themselves. That means greater potential for alpha generation and having a positive impact. Emerging markets rely more on natural resources and have more labour-intensive manufacturing businesses, so there is naturally more opportunity for improvement.

ESG standards are also beginning to matter more. Consider the growing populations, rising middle class, urbanisation and expanding energy consumption. Clearly you need to improve regulation and governance for these economies to grow in a responsible way. Countries such as China and India are jumping ahead in terms of renewable energy adoption. India has a target of generating 57% of its energy from renewable sources like wind and solar by 2027.

ESG investing in emerging markets adds value. Research from the University of Waterloo in Canada shows that the MSCI Socially Responsible Investing (SRI) Index not only ranked higher in terms of mean return than most emerging market portfolios, but also was less vulnerable to negative shocks.

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