Assessing Merits of ESG, Emerging Markets Combination | ETF Trends

With domestic stocks faltering this year, it’s understandable that many market participants are taking cautious views of or outright ignoring emerging markets equities.

On the other hand, emerging markets trade at deep discounts relative to domestic equivalents, and the evolution of sustainable investing could make for a superior avenue for investors looking to position for rebounds in developing economies. The SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG) is one of the exchange traded funds that tap into that theme.

REMG debuted in January, making it one of the newer additions to the emerging markets environmental, social, and governance (ESG) ETF fray, but rookie status aside, the fund is relevant at a time when more experts and market observers are highlighting benefits tied to the emerging markets/sustainable investing combination.

“Sustainable investing can be a win-win for emerging-markets investors. It can be impactful, playing an important role in allocating capital to address climate change and other sustainability issues. It can also improve risk-adjusted returns by incorporating environmental, social, and corporate governance metrics and evaluations to better understand risks and opportunities,” opined Morningstar analyst Jon Hale.

While REMG is a new ETF, investors shouldn’t focus on that. Rather, the point of emphasis is the fund’s investment objective and whether or not it has the potential to reward investors relative to traditional emerging markets strategies. Patient investors may find that REMG does just that.

“This is especially important in emerging markets, where many companies are exposed to higher levels of ESG risks that can become financially material. Those not using ESG in emerging-markets investing are not using all the available tools to help them understand a complex and risky set of investments,” added Hale.

There are some obvious reasons that old guard emerging markets funds can subject investors to undue ESG risk. Namely, these funds often feature high concentrations of commodities producers and state-owned enterprises (SOEs), the latter of which often score poorly on governance policies.

REMG tempers some of that risk by allocating almost 40% of its weight to the technology, consumer discretionary, and communication services sectors. Those are growth sectors, and in emerging markets, they have low exposure to state-run companies. Those sectors can also offer investors better sustainability profiles, and that’s something to consider.

“Emerging-markets funds that have a sustainability emphasis have delivered slightly better returns, on average, than their traditional counterparts. For equity funds, those in the global emerging-markets equity Morningstar Category that are also classified as sustainable investments have an average category rank of 46 out of 100 for the three- and five-year trailing periods (through June 30),” concluded Hale.

For more news, information, and strategy, visit the ESG Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.