New York – As emerging markets become increasingly attractive to investors, Environmental, Social, and Governance (ESG) independent research on these markets is crucial. However, the existing independent ESG research on these markets has serious shortcomings such as lack of enough reliable data, lack of analysis within the specific market’s context, or negative-screening-only research. This situation certainly presents a challenge to investors currently investing in emerging markets, but it also presents an opportunity for independent research providers in the space.
Some of these concerns were addressed earlier this month in London at the Responsible Investor’s conference titled “Sustainable Emerging Markets”. Below, Integrity Research elaborates on the crucial topic of independent ESG research in emerging markets.
Treasured Emerging Markets
Emerging markets have positioned themselves as attractive opportunities for investors since their growth increasingly outshines developed markets’ growth. Investors drool over these markets as opportunities for diversification, returns, and innovation, among other reasons.
The fact remains however, that emerging markets consistently face sustainability issues. These issues might fall within the environmental realm (e.g. carbon emissions or waste management), the social realm (e.g. work force’s occupational accidents or discrimination by gender) or the governance realm (e.g. governance structures or management performance). Indeed several independent organizations and NGOs have exposed several regimes at emerging markets as some of the worst violators of human rights, health, security, and other ESG factors in the world.
Regular investors, not to mention responsible investors, need accurate, comprehensive, and unique research that allows them to gauge their opportunities in emerging markets. The financial crisis that started in 2008 had a negative impact on the sell-side ESG teams, some of which vanished altogether. Independent ESG research providers faced a unique opportunity to expand their offerings and supply investors with this type of research. Unfortunately, we have not seen this happening.
Limited Options Independent ESG Research on Emerging Markets
As we have reported, in the last year the ESG space has undergone major consolidation. Multiple previously independent providers now operate under a few large umbrellas (e.g. MSCI/Riskmetrics; Jantzi-Sustainalytics; Thomson-Reuters/Asset 4, among others). Investors now have a restricted number of options when looking for independent ESG research. The coverage of emerging markets is worrisome not only because of the oligopoly-like structure in the space, but also because coverage in emerging markets presents its own challenges.
“Reliable information and insightful analysis based on sustainability/ESG issues is difficult to acquire, especially in emerging markets,” according Responsible Investor’s conference report titled: Sustainable Emerging Markets: Investing for the Long-Term in Developing Countries. Companies in emerging markets tend to underreport, which would force ESG researchers to implement a variety of tracking mechanisms, which has not been done consistently.
Furthermore, traditional ESG screening is not applicable in many emerging markets given the specific context of that market. ESG models created to screen developed markets’ companies might warn against a company in an emerging market, even if the company excels within its context. Not enough robust emerging market-specific models exist today for investors to measure their opportunities.
Finally, some ESG providers offer coverage of the emerging markets through negative screening. In other words, they offer a list of companies that clearly violate basic standards of ESG compliance. But they fail to analyze in detail a wider group of companies in order to provide the nuances in each case.
Emerging Markets Opportunity
As emerging markets are increasingly creating opportunities for investors, opportunities are also at hand to ESG providers who are willing to offer comprehensive coverage on these regions. Such an offering could add great value to investors (responsible and others) in order for them to gauge their real opportunities.