October 11, 2012
Assets Committed to Emerging Markets on the Increase
by Robert Kropp
A new survey by EIRIS suggests that while sustainable stock exchanges increase investor confidence
in emerging markets investment, poor corporate attention to environmental, social, and corporate
governance issues remains a barrier.
It should come as no surprise to investors and others that by 2020, an estimated 85% of the world's
population will live in developing nations. What may be more surprising is the fact that in 2012,
emerging markets made up more than half of the global gross domestic product (GDP) for the first
Combined with the persistent low returns and volatility prevailing in
developed markets since the financial crisis, the growth of emerging markets makes them an
increasingly attractive investment strategy. A new survey
by EIRIS seeks to determine the factors
considered important to investors in crafting a strategy for investment in emerging markets.
EIRIS describes the survey as a successor to a 2009 report from the
Emerging Markets Disclosure (EMD) Project of US SIF:
The Forum for Sustainable and Responsible Investment. Finding that relatively few emerging
market companies report effectively on environmental, social, and corporate governance (ESG), the
earlier report recommended that investors sign onto the Investor Statement on
Sustainability Reporting in Emerging Markets.
The Investor Statement concluded, "The
signatories to this statement believe that the next generation of leading companies will
distinguish themselves through their commitment to sustainability, as demonstrated through robust
sustainability reporting, and will be correspondingly rewarded by the market."
In its new
survey, EIRIS advises caution "when comparing the 2009 figures to the 2012 ones as there were only
two respondents to the 2012 survey who also completed the 2009 survey." A total of 44 asset
managers, asset owners, and index providers responded to the 2012 survey.
the survey indicates that investment in merging markets is increasing. The assets under management
of the respondents totaled nearly $2.4 trillion, a 30% increase over assets reported in 2009.
Around $161 billion, or approximately 7% of those assets, were allocated to emerging markets in
Sustainable stock indexes in Brazil and South Africa "have leapfrogged their
developed-world peers by creating advanced ESG listing requirements, sustainability indices and
other products to drive disclosure," EIRIS found. The two countries ranked atop the survey's
listing of top performers on emerging markets disclosures, followed by Turkey, Malaysia, and China.
"South Africa and Brazil are leading the way with ESG initiatives which developed markets
could well learn from," Josh Brewer, report author and Head of Financials and Technology team at
The greatest number of respondents, on the other hand, report that they
invest in companies from China; "unsurprising," EIRIS observes, "given its development into the
second largest global economy after the US." China has also increased investor confidence by
greater attention to sustainability issues in its most recent five-year plan, as well as changes to
listing rules that encourage better ESG disclosure by companies.
The stock index most
frequently cited by respondents was the MSCI Emerging Market
index, which cover over 2,700 large, mid, and small cap securities in 21 emerging markets.
Despite the signs of increasing attention to investment in emerging markets, investors remain
concerned over the quality of sustainability reporting by companies. Seventy-eight percent of
respondents mentioned the lack of corporate ESG disclosure as a key challenge to investing in
"Investors identify the environment, compliance with international
norms, such as human rights, and corporate governance as their core sustainability concerns in
emerging markets, just as they are in developed markets," the report states.
On the other
hand, developments such as sustainable stock exchanges and indexes "are driving improvement in ESG
disclosure in emerging markets and helping governments to address the environmental and social
challenges these nations face."
"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," Brewer said. "Our report highlights the enormous
investment potential which emerging markets offer, but also the significant ESG risks that need to
be addressed by investors into these markets."