Investment

Rethinking ESG in emerging markets

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A forward-looking ESG analysis framework combined with traditional economic and balance sheet analysis can provide investors with a comprehensive view of the creditworthiness of borrowers in emerging markets.

Understanding the creditworthiness of emerging markets borrowers increasingly depends on assessing the sustainability of their operations. This includes the way companies and governments treat the natural environment, transparency, and good faith of their governance. For governments in particular it is also about how supportive they are with a fair society.

Our research shows that strong environmental, social, and governance (ESG) factors tend to indicate a more resilient borrower, while weak ESG characteristics can pose significant risks if overlooked. 

Therefore, thorough analysis of ESG considerations is a critical component of how investors should assess the viability of borrowers in these markets.

Such a comprehensive approach includes the combination of forward-looking ESG analysis with traditional economic and balance sheet analysis, providing a more in-depth view of the creditworthiness of borrowers. It also gives investors a stronger basis for investment decisions.

Developing a rigorous ESG model is an ongoing journey, rather than a final destination. As investors in emerging market debt, it is crucial that we continue to re-think our approach when applying ESG standards to emerging markets debt.

Refining an investment approach is also a reflection on the lessons learned from our experience, as well as an increase in the availability and quality of ESG data in emerging markets.

Data limitations

Here it is important to understand that there are current limitations when it comes to using ESG data particularly in emerging markets.

This is because some emerging markets countries either don't report certain data and some data may not be reliable. Time lags in
updating data often makes it backward-looking.

For example, the political unrest in Belarus and the suppression of political opposition in Russia that unfolded in late 2020 indicate heightened ESG risks that are not yet reflected in the available data. At the same time, high pollution, corruption and less access to clean energy are characteristics in developing countries which caps their maximum possible ESG scores.

However, this does not mean that that companies in emerging markets should be off the radar of ESG investors. Approaches that use forward-looking ESG analysis can uncover companies with strong ESG credentials in the region.