- EM companies typically get low scores for ESG from traditional metrics
- In part, that’s because of lower levels of public, English language disclosure of traditional sustainability metrics in EM
- On-the-ground primary research, including regular interaction with management allow for an informed view on the fundamentals and sustainability practices long-term of a company
- Empirical evidence shows that improvements in sustainability metrics can drive market performance for EM companies
Underlying all of these sector trends is the growing importance of sustainability issues for both companies and investors in EM. Sustainability performance is derived from a company’s performance on environmental, social and governance (ESG) metrics.
A core aspect of sustainability also involves assessing the quality of a company’s management and its ability to orient the business away from material risks, toward opportunities.
EM companies = ESG laggards or lower disclosures?
EM companies are sometimes considered laggards in sustainability, given their relatively lower average sustainability scores compared to developed markets peers.
From our experience, however, these lower scores are often less due to actual performance differences and more a reflection of lower levels of public, English language disclosure of traditional sustainability metrics. For example, in carbon dioxide emissions disclosures - the most frequently reported ESG metric among MSCI ACWI constituents - 68% of developed markets companies report Scope 1 and Scope 2 emissions figures, compared to below 45% of EM companies.
Distribution of industry-adjusted ESG scores for three sub-regions
Sustainable leaders outperform, and particularly in EM
The most basic measure of ESG performance, the MSCI ESG EM Leader Index, has demonstrated that companies with top ESG scores significantly out-performed over the past decade, generating 3.09% of annualized out-performance against MSCI EM index since 2010. The MSCI ESG EM Leader Index selects companies with the top 50% of ESG scores within each sector of the MSCI EM Index.
A study by MSCI "How Markets Price ESG: Have Changes in ESG Scores Affected Stock Prices?” demonstrated that from 2013-2017, companies with improving ratings have outperformed the benchmark globally by 0.97% returns annually, this outperformance in EM was higher, at 2.88% annually.
This is also borne out by our experience wherein good quality companies - ESG being one component of quality - tend to outperform poor quality ones over the medium to long term.
Given the lower levels of public English language disclosure of traditional sustainability metrics in EM, there is greater need for primary research on EM companies from an ESG perspective including regular interactions with management and other stakeholders. This helps to supplement data and ESG scores/ratings from third-party providers, and allows for an informed judgement on the fundamentals and sustainability practices of a company.
In addition this can lead to opportunities to engage with the companies and encourage them to improve in their practices. This can not only lead to better ESG scores and ratings for the company but also have a positive impact on their long-term financial performance.
MSCI Emerging Markets Index & MSCI ESG EM Leaders Index, Jan 1, 2010 - Oct, 11, 2020
- Industries / Sub-sectors benefitting from trends that are structural and long-lasting
- Leaders who possess a sustainable competitive edge in one or multiple dimensions, with the ability to deliver above industry growth
- Average to high quality ESG profile that is sustainable over time, while also favoring companies that benefit from ESG themes and trends in the portfolio
- Not primarily involved in controversial businesses
- The past decades created strong winners and losers within sectors, and even more so amongst companies, reflected in stock performance
- Megatrends result in great disparity between winners and losers, perhaps to an even greater degree in EM than in developed countries
- Looking forward, this phenomenon looks to continue or even accelerate, creating sharper differentiation between winners and losers
- Key to long-term investment success in EM equities is the ability to identify these megatrends and, more importantly, future leaders / winners
Find out more about our latest emerging market equites portfolio with a sustainable focus.
Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© UBS 2021 The key symbol and UBS are among the registered and unregistered trademarks of UBS.