By 2020, emerging market GDP will for the first time, overtake the GDP of the developed market. Eighty-five percent of the world’s population will live in emerging markets and consumer spending in China and India alone is estimated to treble to US$10 trillion. At the same time, global sustainability megatrends such as climate change, resource scarcity and human rights will have a significant impact in these markets, according to responsible investment research specialists EIRIS, in a new report, "Evolving Markets: What’s Driving ESG in Emerging Economies?"
Responsible investment allocations to emerging markets have increased by nearly 30% since 2009, according to EIRIS research, with around 25% increasing their exposure to emerging markets in the aftermath of the financial crisis.
“Lower returns and increased risk and volatility in developed markets has potentially resulted in a recalibration of risk/return ratios that make emerging markets more attractive to investors,” said Josh Brewer, report author and Head of Financials & Technology team at EIRIS, but warned that though these markets offer huge investment potential there are also significant ESG risks that must be factored in by investors.
The research revealed that Brazilian and South African stock exchanges have surged ahead of those in the developed world by creating advanced ESG listing requirements, sustainability indices and other products to drive disclosure. Brazilian and South African governments also lead on initiatives to encourage corporate ESG performance with India, China, Hong Kong, Mexico and Turkey making good progress.
There is also strong demand for ESG research on the classic ‘three pillars’ of governance, environment and international norms such as corruption and human rights.
Poor corporate ESG disclosure though remains the leading challenge to investing in emerging markets. Environmental issues, international compliance norms and corporate governance remaining core responsible investment concerns, as they are in the developed markets.