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ESG imperative for emerging market funds

2 March 2021

The next five years will be critical for emerging markets funds to ensure ESG is at the core of investment philosophies, according to RWC Partners.

John Malloy, co-head of emerging and frontier markets, RWC Partners, said a focus on ESG across emerging markets is paramount and there is significant scope for these markets to effect long-term change.

Malloy said: “On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources. They are the drivers of global growth and consumption. Sustainability is a function of their development and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection.”

Malloy said changes in these markets can have major global consequences, including stopping deforestation in Brazil, reducing emissions in China and eliminating poverty in India.

Malloy commented: “ESG considerations are vital when investing in developing countries and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG.”

James Johnstone, head of the RWC Next Generation Emerging Markets Equity Fund, is particularly positive on emerging market commodities, with policy shifts on infrastructure spending in the US and China likely to increase demand for commodities.

Johnstone said: “From a macroeconomic standpoint, global monetary dynamics and further central bank purchases will likely support commodity prices from here. Valuations of companies exposed to commodities remain attractive relative to history, balance sheets are more stable, and capital expenditure plans are more rational.”

The RWC Global Emerging Markets Fund, which has delivered a return of 127.75% since inception, currently has 29.8% of the fund invested in materials and energy sectors, making them the biggest allocations within the portfolio.

The team sees opportunities across Asia, Europe and South America, with valuations across emerging markets looking attractive compared to developed markets.

Malloy added: “In Asia, China, South Korea and Taiwan should see a continued economic rebound led by export growth and consumption. China was up +2.7% in December as PMIs remained robust, while exports growth was strong. Taiwan also rose +10.5% as the country’s growing technology sector continued to drive economic growth.

“In Latin America, Brazil’s structural reforms will likely aid the country’s fiscal dynamics while the country’s PMIs remain expansionary. We also expect Russia will benefit from a higher and more stable oil price as it remains well-supported as demand recovers amid curtailed supply.”

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