Investors long frustrated by the volatility and low quality associated with some emerging markets equities have options for revisiting the asset class, and environmental, social, and governance (ESG) virtues could set the stage for better long-term outcomes. Some exchange traded funds are geared specifically to meet this demand. One member of that group is the SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG).
REMG, which benchmarks to the Bloomberg SASB Emerging Markets Large & Mid Cap ESG Ex-Controversies Select Index, debuted in January. While that probably doesn’t amount to good timing due to the struggles of emerging markets stocks in 2022, the overall long-term trajectory for the emerging markets/ESG combination is alluring, and it’s one more global investors are paying increasing attention to.
“Sustainable finance incorporates ESG principles into business decisions and investment strategies, covering issues from climate change to labor practices. It has become more mainstream in emerging markets in part because of pandemic-related financing needs, such as healthcare, as well as Latin America’s surge in climate-related borrowing,” according to the International Monetary Fund (IMF).
While that’s a commentary on debt issuance, it does highlight developing economies’ ongoing embrace of sustainability and efforts to bring more ESG principles into financing endeavors. Regarding Latin America, REMG allocates about 9% of its portfolio to that region.
Some global investors see value in the emerging markets/ESG marriage, and that this combination could pay dividends over the long haul.
“ESG investments now make up almost 18 percent of foreign financing for emerging markets excluding China, quadruple the average for recent years,” added the IMF. “The ESG ecosystem in emerging markets has grown not only in size but also broadened across other dimensions.”
What’s critical to the long-term potency of ESG in emerging markets is that economies beyond China embrace ESG in significant fashion. Currently, China looms large in emerging markets ESG funds — a point reflected in REMG, which devotes 32.54% to Chinese stocks. As more developing economies prioritize ESG principles, the broader investment thesis could be fortified.
“Recent gains in ESG markets may be an important opportunity for emerging markets to access more stable funding sources and develop a broader and more mature sustainable finance ecosystem. With many of these nations highly exposed to climate hazards and already facing related transition challenges, private finance will play a crucial role in mitigating these risks and strengthening the financial sector,” concluded the IMF.
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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.