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洞见 16.04.2018

Sustainable EM corporate debt

Sustainable EM corporate debt

A new asset class for responsible investors


Key Points

  • Responsible investment has been growing steadily in recent years, reaching USD 22.9 trillion in 2016.
  • Nonetheless, the offering of sustainable emerging market (EM) credit portfolios is limited, as investors remain sceptical that environmental, social and governance (ESG) considerations are compatible with emerging markets.
  • ESG champions already exist amongst EM corporate issuers. EM sovereigns are also stepping up, especially in the fight against climate change.
  • We believe that the number of ESG-mindful EM companies will continue to rise, as issuers respond to investors’ new requirements for sounder business practices and stricter local environmental and social regulations.
  • This is creating opportunities to construct sustainable EM corporate bond portfolios, which should offer superior and more sustainable risk-adjusted investment returns and provide new, attractive and diversified opportunities for responsible investors.
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Responsible investment has grown but often ignores EM credit strategies

According to the latest Global Sustainable Investment Review, responsible investment (RI) has been growing rapidly over the last few years. Assets that are professionally managed under responsible investment strategies reached USD 22.9 trillion in 2016, an increase of 72% since 2012. In relative terms, RI now represents 26% of all professionally managed assets globally. Penetration is even higher in Europe, where it reaches 53%.

Nonetheless, when it comes to managing emerging market (EM) fixed-income portfolios, sustainable investment approaches are still marginal, despite the fact that several academic studies have shown that the positive relationship between environmental, social and governance (ESG) criteria and financial performance tends to be stronger in fixed income than in equities and in emerging markets than in developed markets.

A few strategies focus on EM sovereigns, primarily through exclusions of a number of countries. But best-in-class ESG approaches to EM corporate bond portfolios are rare. Indeed, when one mentions the benefits of integrating ESG criteria into constructing EM portfolios, the first reaction is often one of scepticism. Admittedly, the level of extra-financial disclosure by EM issuers is still below that of developed market (DM) countries. Moreover, ESG norms and requirements can be looser in EM countries, and news headlines often point to cases of poor practice, involving, for instance, child labour, severe pollution and corruption.

Despite this, EM corporate issuers with strong or average ESG credentials (rated AAA to BB by MSCI ESG Research LLC), already represent more than half of the JP Morgan CEMBI Broad Diversified index, while companies with poor ESG credentials – so-called “ESG Laggards” (i.e. companies with a B or CCC ESG rating) – represent about 30% of the index.

EM ESG champions do exist

There is an increasing number of EM issuers which distinguish themselves by their ESG credentials or by their positive social or environmental impact, in line with the UN’s 17 Sustainable Development Goals (SDG).

Among them, Arcelik Anomim Sirketi is a high-yield Turkish company which enjoys an AAA ESG rating from MSCI ESG Research LLC. Arcelik produces and distributes consumer durable goods and electronics, and operates across seven countries, including Russia, Thailand and South Africa. It owns recycling facilities, conducts regular internal & external audits, and participates in the Global Reporting Initiative’s (GRI’s) Supplier Business Transparency Programme.

Also in Turkey, the CEO of Turkcell Illetisim Hizmetleri A.S. was recognised by the United Nations (UN) as one of ten 2017 SDG Pioneers.

Kaan Terzioglu received recognition for creating the “Hello Hope” mobile app, which helps refugees access key health and education services.

Another example can be found in Mexico: Infraestructura Energética Nova (IEnova) is a company which develops, builds and operates energy infrastructure. It demonstrates strong sustainability policies, notably in terms of social factors – thanks to its best practices in terms of health and safety standards – as well as on environmental factors – thanks to the development of projects to preserve biodiversity, such as reforestation and the protection of wildlife. MSCI ESG Research LLC recognised these best practices by assigning it a single-A ESG rating.

EM sovereigns take a leading role in the fight against climate change

The trend is also true at sovereign level. Environmental considerations are by definition global, and emerging countries are aware of this. Among the 79 EM countries included in JP Morgan EM sovereign and corporate bond indices, all are signatories to the Paris Agreement on Climate Change and only twelve have not yet ratified it.

EM countries’ recognition of the necessity and importance of environmental policies can also be illustrated by recent events, which all happened this month:

  • 11 March: the first International Solar Alliance (ISA) summit, co-hosted by India and France, was held in New Delhi. The ISA was launched in 2015 at the initiative of Prime Minister Modi and now includes 121 nations.
  • 13 March: creation of a new Ministry of the Ecological Environment in China, in charge of the country’s ecological environment policies, monitoring and law enforcement.
  • 18-23 March: the eighth World Water Forum was organised in Brasilia by the World Water Council (WWC), whose members include over 300 organisations from more than 50 countries. Out of the 99 private company members of the WWC’s third college of Enterprises and Facilities, 72 are domiciled in an EM country.

While these government initiatives will not immediately shape their domestic companies’ creditworthiness, it seems reasonable to expect that, over time, stricter environmental requirements will affect EM as much as DM corporate issuers, which will need to adapt to the new standards.

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