Emerging Markets Could Be Turning Their Attention to ESG

The coronavirus pandemic did no favors to emerging markets (EM) investors who are now looking around scratching their heads, wondering where to head next. While a dollar-cost averaging approach to EM assets as a value play might be an option, EM investors are looking to other options that can weather a storm better—enter environmental, social, and governance (ESG) investing.

Per a Bloomberg report, EM investors “may have identified the assets that offer sustainable post-pandemic returns. Now they just need to find more of it.”

This is where ESG comes into play. Despite the downturn brought on by the pandemic, ESG has been able to mute the effects and in some instances, outperform other sectors.

“The worst crisis since World War II is prompting some fund managers to rethink their strategies in a world with $13.7 trillion of sub-zero yielding debt and an increasing view that a V-shaped recovery is unlikely,” the Bloomberg article said further. “Seeking opportunities in ESG, investments in countries and companies that are improving environmental, social, and governance standards, are becoming crucial more than ever as investors navigate the pandemic-stoked market volatility.”

“This is a crisis unlike anything we’ve seen and we cannot just go back to our old textbooks anymore that say ‘go buy the dip’,” said Thu Ha Chow, a money manager at Loomis Sayles Investment Asia Pte, who has been investing since Enron’s collapse. “The social and governance elements are going to be more important, but they can be harder to find in emerging markets.”


^MSACWIESGL data by YCharts

ESG ETF Exposure

Investors who want ESG exposure via an ETF wrapper can take a look at the Xtrackers MSCI EAFE ESG Leaders Equity ETF (EASG). EASG seeks investment results that correspond generally to the performance of the MSCI EAFE ESG Leaders Index.

The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index. The underlying index is a capitalization-weighted index that provides exposure to companies with high ESG performance relative to their sector peers.

An additional fund to look at is the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which has been a popular play for investors seeking exposure to socially responsible investments. USSG was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The underlying MSCI USA ESG Leaders Index provides exposure to large- and medium-cap U.S. companies with high ESG performance relative to their sector peers.

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