Invest in Emerging Markets With an Eye on ESG

Emerging markets (EM) can offer an ideal growth option, but more discerning investors may want an environmental, social, and governance (ESG) component. This is inherent in the Avantis Responsible Emerging Markets Equity ETF (AVSE).

The ESG realm is not just for developed markets. The global transition to more sustainable energy sources, for example, is causing EM countries to take a look at their own carbon emissions and create their own net-zero goals.

Other ESG principles that are permeating into EM countries along with sustainability.

“The sustainability movement that began sweeping the corporate world in advanced economies decades ago is now hitting emerging market companies full force,” a Boston Consulting Group (BCG) blog noted. “From China to the United Arab Emirates to Brazil, companies are finding that mere pledges to go green and be socially responsible and transparent are not enough. They’re under intensifying pressure at home and abroad from consumers, trading partners, investors, regulators, and employees to back their commitments with verifiable action—and they’re being punished for shortcomings.”

Furthermore, EM companies are realizing that incorporating ESG principles into their business operations is imperative in order to stay competitive from a global standpoint. In essence, adaptability can positively affect the bottom line.

“CEOs also realize that sustainability is becoming increasingly important for their overall performance—and to building the resilience needed to manage risk and disruption in today’s rapidly evolving international business landscape,” the BCG blog added further. “Recent BCG research has found a strong correlation between emerging market companies’ scores in environmental, social, and governance (ESG) indexes as well as key financial and valuation metrics. It is now clear that the sustainability imperative is transforming the very nature of global competition.”

Deep Diversification in EM Equities

The diversification from AVSE draws from over 2,000 equities (approximately 2.352 holdings as of April 30). One salient highlight of AVSE is its focus on value by looking at a company’s future profitability prospects relative to its price.

AVSE “invests in a broad set of companies of all market capitalizations across emerging market countries and is designed to increase expected returns by overweighting securities believed to be trading at lower valuations with higher profitability ratios,” according to its product website. Furthermore, it adds another layer to screen out companies that comply with its ESG focus.

“Limits the investable universe of companies by screening out those that raise concerns based on the team’s evaluation of multiple Environmental, Social and Governance (ESG) metrics and pursues the benefits associated with indexing but with the ability to add value by making investment decisions using information based on proprietary evaluations,” the product website added.

Additionally, its cost effectiveness is apparent in its 0.33% expense ratio. In current times where inflation is high and cost effectiveness is top-of-mind, AVSE is an ideal solution.

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