With governments around the world pledging their commitment to net zero, there is a question mark over how to balance growth and sustainability across emerging and frontier markets.
To date, the UK, US, France, Denmark, Japan and New Zealand have all committed to achieve net zero by 2050, while China has set its target for 2060.
However, emerging and frontier markets are at a different stage in their ESG journey to developed markets, and face a host of challenges in their transition, including poverty, a lack of resources, growing population and the effects of climate change.
Emily Fletcher, co-manager of BlackRock Frontiers Investment Trust, comments: “We feel strongly that the world cannot craft a path to net zero emissions without emerging and frontier markets playing a pivotal role.
“While the stage of economic development in some cases presents challenges, we do not view sustainability and economic growth as incompatible ambitions. For many of the companies in our investible universe, addressing climate risk embedded in their business is new.
“This presents an opportunity for fundamental investors with a deep understanding of these companies’ business models. In our view, both public equity and other forms of capital have a key role to play in incentivising and supporting companies through this crucial transition.”
For Usman Ali, partner and head of ESG and engagement at Mobius Investment Trust, there are a host of opportunities across emerging markets within sectors such as renewable energy and environmental technologies, but they require investors to adopt a long-term view.
Ali explains: “For such sectors, patient capital is required. Transforming and establishing new energy projects can take between five to ten years. Accordingly, investors must have a long-term horizon.
“It is also important for sustainable growth to impact the real economy. Being underweight or overweight in a sector such as fossil fuels will not necessarily translate into a real-world impact.
“Investors must critically use data and assess the true impact of their portfolio companies rather than through the limited lens of how the portfolio compares to the MSCI Emerging Markets Index.”
According to industry experts, investors need to take a different investment approach to emerging and frontier markets than to developed markets.
Ali says: “There is no one-size-fits-all when it comes to ESG in emerging markets. Each country and sector is confronted with unique ESG challenges and opportunities.
“Emerging and frontier market countries are also among the most exposed to the impacts of climate change as well as local pollution and resource scarcity issues.
“These challenges are likely to intensify in the coming years.”
According to Fletcher, the variability in quality and disclosure of ESG information across emerging markets also requires investors to take an active investment approach.
Fletcher says: “Societal values and concepts are now always consistent between developed and emerging/frontier markets, which necessitates a nuanced approach to ESG assessment and engagement.”
Andrew Ness, portfolio manager of Templeton Emerging Markets Investment Trust, adds: “Innovation is at the cornerstone of emerging markets today. Companies in these markets are innovating faster and to a more successful extent than their developed market peers. We are seeing agile companies adjusting their business models to adapt to the changing world.”