3 Reasons Why Investors Should Look At Emerging ESG Markets

The global economy has been in an inevitable march towards a recession, as markets trend downward and consumers are seen making cutbacks as red-hot inflation and aggressive mortgage rate hikes eat into their disposable income. 

With much of the year already behind us, investors are constantly looking toward the upcoming year, hopeful that it will deliver more promising prospects. At the same pace, investors are parking their cash in recession-proof investments, and many are seeking potential opportunities in environmental, social, and governance (ESG) investing strategies to prop up their long-term game plan. 

ESG investing has been a hot topic for much of the last couple of years, as policymakers and government entities push the private sector to take on more environmental and social responsibility. 

The widespread call for action has seen a slew of ESG reporting standards being introduced over the last few years only to see a sharp take-off at the height of the pandemic. 

Now, a Bloomberg Intelligence report found that global ESG assets may surpass $41 trillion in 2022, reaching $50 trillion by 2025. By current models of prediction, ESG assets currently fulfill more than a third of the total global assets under management according to the Global Sustainable Investment Association.

While the forward-looking prospects seem reassuring heading into 2023, there is still a strong concentration of these assets being located primarily in developed economic markets. Both the United States and Europe currently make up the majority of these assets, which in turn has led to experts suggesting investors should start looking towards emerging markets as they grow their ESG interest.

According to the Chinese-based asset management firm, Southern Asset Management, developing economies can provide foreign investors with a shifting prosperity. “While most developing markets regulate and introduce ESG practices and standardization methodologies at their own pace, investors will need to shift their focus in the coming years, as these regions could provide both near-term and long-term growth opportunities.

Southern Asset Management recently completed a principle of responsible investment case study, leading them to become shortlisted for the PRI 2022 Responsible Investment Award on the Facilitating Climate Transition-Application of Carbon Emission Database, a United Nations-led project under the helm of the United Nations Principles for Responsible Investment (UNPRI).

With ESG trends now starting to spill over, here’s a look at why investors should focus their attention on emerging markets in the new year. 

Moving pass the peak of the U.S. dollar

Over the year, the U.S. dollar has hit new highs, pushing other currencies including the pound, euro, and Japanese yen to new bottoms. The cause has been strongly related to the Federal Reserve aggressively ramping up interest rates to help tame soaring inflation.

Currently, investors are hopeful that the Federal Open Market Committee (FOMC) will slow down its monetary tightening. As the U.S. economy starts to rebound, and the interest rate cycle matures, it could lead to the growing momentum of emerging markets outside the country.

With the dollar looking to weaken, other markets could see the appreciation of their currencies, which could help lead to growth in commodity exports, which could help support these markets as global demand steadily increases again.

It is perhaps a longshot, and this point of view does come with its own set of challenges, but investors could potentially see an appreciation of domestic currencies in emerging markets that can solidify their resilience against the backdrop of macroeconomic turndown. 

Improving global supply chains and trade agreements 

The pandemic brought about a slew of global lockdowns, seeing major exporting countries remain shut off to the rest of the world, even as COVID cases started to wane. When the world managed to step out of the pandemic, geopolitical tension between Russia and Ukraine only further disrupted the global supply chain, leading to repercussions that were felt by countries across the world.

While trade agreements between some countries in North America and Europe remain complex, a shift in foreign policy might lead to more maturing trade agreements between developed countries and emerging markets.

Perhaps it would see some countries, more so the U.S. than others, strengthen their ties with existing allies, and foster new relationships with developing nations in Africa, Latin America, and Southeast Asia. For much of this to happen, it would require a shift in political agenda, but the economic repercussions could lead to greater growth and further development in these nations.

As global trade between these nations strengthens, countries will become more open to adopting ESG standardization methodologies to draw in not only foreign investors but also help to solidify potential trade agreements. 

Growing ESG standardization in China 

While other developed markets have been actively introducing a slew of ESG disclosure protocols to help promote environmental, social, and governance within the financial sector and to help investors make more informed investments - China has rather leaped towards common prosperity and social stability.

The ESG standards introduced mainly by the Chinese government aims to establish a new framework through which officials will be able to assess risk and performance indicators for domestic investors, rather than foreign or Western investors.

Shenzhen Securities Information, a wholly-owned subsidiary of the Shenzhen Stock Exchange (SZSE) launched its CNI ESG Rating Methodology framework, accompanied by a set of indices based on this methodology back in July 2022.

What the methodology aims to do is to bring an emphasis to ESG reporting to those companies included in the SZSE and accompanying indices. Although this would help domestic investors make more informed investment choices, based on companies’ ESG reporting, the government still emphasizes the country’s dual carbon and common prosperity goals.

While it is possible to have these goals interlocked with the broader macro ESG methodology, it leads to further complications such as ESG investors only focusing on short-term returns, rather than long-term gains, and ongoing market volatility due to social protocols imposed by the government. 

2 Favorite ESG stock picks 

The list of ESG stocks is ever-growing as an increasing number of companies look to become the leader of sustainable, social, and corporate governance in their respective industries.

The conversation related to climate change has been a popular topic of conversation for much of the year, and it’s not only investors driving the debate, but consumers are also taking part in holding private institutions accountable for their environmental practices.

On the back of this, there has been growing interest in social and governance, with multinational high-profile names adopting widespread social responsibility and introducing governing policies. 

The bottom line 

Investors are steadily jumping onto ESG-based investing as these strategies prove more viable for long-term growth and help to solidify their placement within emerging markets.

While investors have lived through yet another tumultuous year of economic turmoil and sinking market sentiment, 2023 could prove to have some upside as emerging economies work to improve their ESG standards. These efforts would mean that some companies could improve their supply and demand in developing nations, alongside the strengthening of global trade deals.

Though there is still a high level of uncertainty among investors in the market, ever-developing consumer behavior and trends, alongside a changing economic cycle would mean investors can look to banks on emerging markets for their ESG investment needs.