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High ‘ESG Rating’ Companies In Emerging Market Show ‘Stronger Performance’


Amid the increasing demand for larger choice of asset from the ESG investors, it is “important to understand how the performance of EM equities” gets “affected” by various “ESG factors”.

Dailycsr.com – 20 April 2017 – The asset manager of “Dutch-headquartered” NN Investment Partners’ analysis show that investing in the equities of emerging markets that has “high environmental, social and governance” rating will result in a “better performance” when seen in context of “country and sector factors”, reports Roger Aitken, while “high ESG rating” companies are delivering “higher Sharpe ratio”.
The said report has been constructed in association with the “European Centre for Corporate Engagement (ECCE) at Maastricht University’s School of Business and Economics” and bears the title of “The Materiality of ESG factors for emerging markets equity investment decisions: academic evidence”, whereby it asserts that it is the “first comprehensive investigation” that looks into the “performance of EM equity portfolios” under the “ESG criteria”.
The data thus investigated show that in the month of June 2012, there were “650 companies in the EM universe”, while the same figure grew to “751 companies” by the month of June 2015. Moreover, it was found that companies that had an “ESG ratings” had a strong investment hold in emerging markets rather than “developed markets”, although the “most important corporate governance driver” related to the “ownership structure”.
It is a seven-page long report which also informed that companies in emerging markets with a “ESG rating” tend to overtake the ones with “a low rating on a risk-adjusted basis”, while the performance on the whole receives a boost by “excluding companies with controversial ESG behaviour”.
The NN IP’s “Head of Equity Specialties”, Jeroen Bos, said:
“This new report confirms a number of important findings from our prior report on ESG factors in DM equities.
“We have now found a clear and positive relationship between incremental changes – or momentum – in a company’s ESG scores and investment performance in both developed and emerging markets.”
Furthermore, he also stated:
“Excluding companies with controversial ESG behaviour also resulted in an uplift in the Sharpe ratio, similar to our experience in Developed Markets. The implication for investors is to consider both level and changes in ESG scores when constructing an emerging markets equity portfolio, as both factors contributed to risk-adjusted outperformance.”
However, the report opposes the practice of company portfolios being adjusted for accommodating the varied “ESG ratings” that stem from “different cultures, regulatory regimes, ownership structures and business practices” of countries around the globe.
While, the senior portfolio manager of “Emerging Markets Equity Boutique” at NN IP, Nathan Griffiths, said:
“It is important to understand how the performance of EM equities is affected by these ESG factors because there is growing demand among ESG investors for a broader choice of assets.”
“Furthermore, the ESG challenges at play in EMs can be very different to those in DMs. But in general, if a company makes a meaningful effort to improve its ESG policies then it can, on average, expect better relative share price performance.”
It is often assumed that companies in emerging markets do not pay much attention to the “sustainable practices” that are “increasingly” gaining the line light whereby turning into “an essential requirement for companies in developed markets”. Nevertheless, the NN IP thinks that the “asset management industry” has to play the “important” role of “holding EM companies to account on ESG factors” that will be driving “investment decisions”.