ESG analysis: critical for emerging market investors
With socio-political upheavals becoming the status quo of the world (ACWI) (VTI) economy, it only makes more sense now to pay closer attention to the often ignored, environmental, social, and governance (ESG) indicators of economies before investing in them.
ESG factors have the potential to affect the short and long-term performance of investment portfolios. Especially when you look at the “riskier” emerging markets (EEM) (VWO), and the current socio-political disturbances that are recurrent in many of these countries, ESG analysis gains prominence. For investors seeking long-term returns from an economy, knowledge of the social and governance situation prevailing is extremely important. These factors should be duly considered by sovereign investors while making investment decisions regarding an economy.
Ranking countries on the basis of their score on ESG indicators is a means to understand how well a country is run from the perspective of social stability, dealing with longer-term issues such as aging demographics, as well as environmental protection. ESG analysis involves anything that involves the interests of the future generation.
ESG complements traditional sovereign bond analysis
For bond (BND) (AGG) investors, environmental, social, and governance analysis serves as a good complement to the traditional sovereign bond analysis. Traditionally, sovereign debt investors look at hard data such as budget deficits, debt, and competitiveness. While these metrics do serve as an important guide to the credit-worthiness of an economy, they are less reflective of the socio-political situation, and the level of regulation or corruption in an economy.
Let’s now quickly look at the best and worst emerging markets (EEM) (VWO) on the basis of their ESG rankings.
RobecoSAM, an investment specialist focused exclusively on Sustainability Investing, has been conducting these studies for over two decades now. For the purpose of our analysis, we will be relying on RobecoSAM Country Sustainability Ranking October 2016.