Now Reading
Emerging-Market Investors Can't Afford to Ignore ESG Factors
Emerging-Market Investors Can't Afford to Ignore ESG Factors
Published 02-23-22
Submitted by AllianceBernstein
Most investors need little persuading that emerging markets offer exciting opportunities. The emerging-market (EM) corporate bond market in particular presents a tantalizing prospect for investors: Its size and strong historical performance make it impossible to ignore.
But emerging markets also pose significant and complex challenges. Some challenges—such as inconsistent regulations and a lack of standardization across countries—reflect the diverse nature of emerging markets. But others, such as the seemingly intractable problems of pollution and corruption—are ESG risks.
These risks can be material. Our analysis shows that, from 2016 through 2021, two-thirds of the worst-performing credits in the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) were those with weak ESG practices.
Take NMC Healthcare, a private healthcare provider based in the United Arab Emirates. NMC Healthcare illustrates how governance risk can adversely affect investors. The company understated its borrowings by US$4 billion over several years. When the extent of its poor governance came to light in 2019, it was placed in administration and bondholders suffered an 80% loss. Similarly, Chilean coal-fired power company Guacolda Energia saw its bond price—and bond ratings—plunge when it resisted diversifying away from coal toward renewable resources, which led to difficulty securing long-term contracts. Investors who can thoroughly assess a company’s ESG risks can get ahead of such bad news.
At the same time, efforts by conscientious companies to improve their ESG practices can pay off handsomely for investors. ContourGlobal, a UK-based power generation company with operations in Brazil, Bulgaria and Africa, enhanced its governance and environmental risk profiles by carrying out an initial public offering—making it subject to increased scrutiny and standards of transparency—and committing to not build new coal plants. These initiatives resulted in a significant decline in the company’s cost of funds, and investors in the company’s bonds saw their holdings outperform.
Of course, ESG risks to investing in EM debt should be kept in perspective. For example, emerging countries’ per capita carbon emissions are much lower than those of developed countries. And not all EM companies are ESG laggards; some are leading the charge to slash emissions. Mexican chemical company Orbia Advance, for example, has some of the lowest emissions and most ambitious carbon-reduction plans in the industry—indeed, better than those of many leading US and European chemical companies.
The bottom line? ESG isn’t an alternative approach to traditional sovereign or corporate-credit analysis. It’s the foundation on which long-run economic performance is built. That’s why the key to unlocking opportunity in emerging markets lies in fully integrating ESG factors into bottom-up research and the investment process. We think that bond investors—whether or not they are driven by explicit responsible-investment objectives—are likely to see the merit of such a win-win proposition.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.
AllianceBernstein
AllianceBernstein
AllianceBernstein (AB) is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals, and private wealth clients in major world markets. We believe corporate responsibility, responsible investing and stewardship are intertwined. To be effective stewards of our clients’ assets, we strive to invest responsibly—assessing, engaging on and integrating material issues, including environmental, social and governance (ESG), and climate change considerations in most of our actively managed strategies. We also believe that strive to hold ourselves as a firm to similar practices that we ask of issues. Our stewardship practices, investment strategy and decision-making are guided by our purpose, mission and values.
Our purpose—pursue insight that unlocks opportunity—inspires our firm to act responsibly. While opportunity means something different to each of our stakeholders; it always means considering the unique goals of each stakeholder. AB’s mission is to help our clients define and achieve their investment goals, explicitly stating what we do to unlock opportunity for our clients. We became a signatory to the Principles for Responsible Investment (PRI) in 2011. This began our journey to formalize our commitment to identify responsible ways to unlock opportunities for our clients through integrating material ESG factors throughout most of our actively managed equity and fixed-income client accounts, funds and strategies. AB also engages issuers where it believes the engagement is in the best financial interest of its clients.
Because we are an active manager, our differentiated insights drive our ability to deliver alpha and design innovative investment solutions. ESG and climate issues are important elements in forming insights and in presenting potential risks and opportunities that can have an effect on the performance of the companies and issuers that we invest in and the portfolios that we build.
Our values provide a framework for the behaviors and actions that deliver on our purpose and mission. Values align our actions. Each value emerges from the firm’s collective character—yet is also aspirational.
- Invest in One Another means that we have a strong organizational culture where diversity is celebrated and mentorship is critical to our success. When we invest in one another, we empower our employees to reach their potential, so that they can help our clients realize theirs. This enables us to partner with clients to design and deliver improved investment outcomes.
- Strive for Distinctive Knowledge means that we collaboratively identify creative solutions to clients’ economic, ESG and climate- related investment challenges through our expertise in a wide range of investment disciplines, close collaboration among our investment experts and creative solutions.
- Speak with Courage and Conviction informs how we engage our AB colleagues and issuers. We seek to learn from other parts of our business to strengthen our own views. And we engage issuers for insight and action by sharing ideas and best practices.
- Act with Integrity—Always is the bedrock of our relationships and has specific meaning for our business. Unlike many other asset managers, we’re singularly focused on providing asset management and research to our clients. We don’t engage in activities that could be distracting, or create conflicts—such as investment banking, insurance writing, commercial banking or proprietary trading for our own account. We are unconflicted and fully accountable.
As of September 30, 2023, AB had $669B in assets under management, $458B of which were ESG-integrated. Additional information about AB may be found on our website, www.alliancebernstein.com.
More from AllianceBernstein
