ESG Feature – Emerging markets
China’s influence over the world takes many forms. It is the globe’s second largest economy after its GDP expanded by an average of 10% a year in the decade to 2021. It controls the world’s largest army of 2 million soldiers and it emits more of the planet’s climate-destroying greenhouse gases than any other country. China’s rapid industrialisation has lifted millions of people out of poverty, but that has come at a price. It has been largely fuelled by coal. Two-thirds of its energy emanates from those little black rocks, making it the world’s largest consumer, accounting for half of the coal burned globally. Demand in Chi- na is expected to increase, as they have been building more coal-fired power stations since 2018.
The figures already make difficult reading. China is responsi- ble for a quarter of the world’s greenhouse gas emissions. When the rest of the developing world is included, the figure shoots up to 63%, the Centre for Global Development says. This makes it difficult for some to invest in emerging market assets, with almost three quarters (74%) of UK pension schemes working to a net-zero target or planning to commit to one in the next two years, according to the Pensions and Life- time Savings Association (PLSA).
“Emerging markets face some of the biggest sustainability challenges in the world,” says Eric Nietsch, head of ESG, Asia at Manulife Investment Management. “Companies that are ad- dressing these challenges could outperform.”
Keep it clean
When it comes to investing in the developing world while building net-zero portfolios, an obvious asset class stands out. For Nietsch, wind and solar power look likely to be the win- ners, as governments become increasingly concerned with en- ergy security. “Renewables tend to be domestic sources of ener- gy, so they can increase energy security,” he says. Asia, predominantly China and South Korea, is where most materials for wind and solar power infrastructure are produced along with batteries for electric vehicles. “With the global ener- gy transition there is a huge opportunity for emerging markets to meet that demand to help the world meet their energy tar- gets,” Nietsch says. But climate change is not the only issue investors are consider- ing. Inflation is raging across emerging markets, so investors need to ensure that bond issuers can raise the capital needed to meet the interest payments on their debts. “In higher-rated emerging market sovereigns, the buffer to absorb higher food and fuel prices is greater than in weaker, single B-rated names. This does not mean, however, that investment-grade credits are immune,” says Uday Patnaik, head of emerging market debt at Legal & General Investment Management (LGIM).
“India is a case in point – in the light of higher international 36 | portfolio institutional | June 2022 | issue 114
energy prices, the sovereign has temporarily suspended limit- ing the use of coal to ensure cheaper domestic energy supplies to help reduce inflationary pressures,” Patnaik adds. For some, investing in a heavily emitting company that is mov- ing in the right direction could be more important than one that just ticks all the boxes to be a green investment. “We are not trying to get the best-in-class, we want the compa- nies and governments which are an improving story,” says Carl Shepherd, an emerging market fund manager at Newton Investment Management.
“What is happening in Ukraine will accelerate the move away from a dependence on fossil fuels, but it will create a backward step in the near term, as countries scramble to source energy from elsewhere as cheaply as possible in light of inflation. “Short term there is bad news, but it could accelerate a move to cleaner energies. So, it is not all doom and gloom,” he adds.
Take them with you No matter what you invest in, you need to make sure that in trying to solve the carbon emissions problem that you do not cause a social problem. A just transition means that no one is left behind and that instead of decimating communities, inves- tors are providing alternatives by, for example, funding educa- tion programmes.
“It is important for investors in emerging markets to not just con- sider the energy transition, but a just transition,” Nietsch says. However, fears that reducing carbon emissions in these mar- kets could pull more people into poverty may be misplaced. “We believe that reducing carbon emissions in emerging mar- kets will have a net positive social impact. It is expected to cre- ate more jobs than it would displace,” Nietsch says. “It would protect some jobs from the physical risk of climate change and reduce the death and illness associated with air
We are no longer a lone voice knocking on the door asking to talk about climate change.
Madeleine King, Legal & General Investment Management
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