Article

Emerging markets are already being hit disproportionately

Undaunted by the ESG challenge
Introducing the series
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This is the second article in our new series, which looks at environmental, social and governance issues in the fixed income space.
Our unfixed approach
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In the spirit of (un)fixed income – bold, innovative and flexible – we start each piece with an ESG challenge before flipping it on its head.
Answering the big questions
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The aim of this series? To explore how investors can successfully navigate some of the greatest issues of our age.

In this second piece in our article series, we highlight the disproportionate impact that climate disruption could have – and is already having – on emerging market economies.

A report from the Global Climate Risk Index finds that eight out of the ten countries most affected by the quantified impacts of extreme weather events in 2019 belonged to the lower-middle income category (Figure 1).1

What’s more, when disasters do occur, emerging markets are often less financially equipped to deal with the effects. 

Figure 1: ‘Most of the countries worst affected by extreme weather events from 2000-2019 were emerging markets’

Source: Global Climate Risk Index Report, 2019.

However, while the headlines are often full of statements about corruption, social inequality and polluting industry, emerging market economies can also be a hub of exciting ESG potential.

The use of onshore wind power in Brazil and solar power in India and Africa, for example, highlights opportunities to democratise energy in an environmentally sustainable way for growing populations. Many simply aren’t aware that emerging markets have these renewable energy resources at their disposal.

What’s more, Craig Altholz (Client Portfolio Manager, Emerging Market Credit) notes that ‘steering private capital towards countries willing to improve ESG conditions can entice other countries to address ESG standards’.

A similar phenomenon is captured by Figure 2, which shows that ESG spending helps countries generate greater economic activity within their own borders, thereby initiating a positive feedback loop. 

Figure 2: ESG-driven fiscal spending generates a multiplier effect

Source: Institute of International Finance, 31 December 2020.

That said, some challenges do remain. Elsewhere in this series, we’ve highlighted the fact that data issues don’t always make things easy for investors looking to assess the materiality of the risks for specific issuers.

While third party research providers like MSCI are excellent resources, their dependence on easily accessible public data means that their value from an investment standpoint is limited.

This is especially true in areas like emerging market debt, where obtaining relevant data can be more challenging. In the words of Gerald Evelyn (Client Portfolio Manager, Multi Sector Global Debt): 

At Invesco, our fixed income teams see engagement as a way to gather additional insights and raise issues of concern.

Our local debt team carries out approximately twenty country visits and over 100 engagement meetings each year. This includes direct contact with local policymakers and stakeholders, as well as participation in collective engagement initiatives like Climate Action 100+.

Engagement is at the heart of the team’s culture, and it’s a real advantage in a market where smaller competitors may struggle to get access to these key stakeholders.

The team recognises the importance of ESG factors in the context of performance, adding that ESG ‘increases the robustness and completeness of a manager’s investment process’.

Our hard currency team is similarly engaged, with positive results. They find that EM sovereign and corporate issuers have good reasons to care about ESG goals, with ESG investment reducing the cost of capital. 

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