Major banks see opportunity in unlisted emerging market ESGs

As financial markets face significant headwinds in 2022, environmental, social and governance (ESG) funds have seen their first net outflow since 2011. However, the energy transition, climate-related threats to food security and the search for long-term value could lead to a comeback. Sustainable investment in emerging markets.

After global ESG funds enjoyed a record-breaking 2019 to 2021, growing by 98% and seeing net inflows of $25 billion in 2020 and $35 billion in 2021, net outflow from ESG funds in 2022 was $13.2 billion by Nov. The 10 largest ESG funds posted double-digit losses over the period, and eight of them underperformed the S&P 500, which fell 14.8%.

It is important to note, however, that non-ESG funds also experienced a net outflow of $420 billion during this period.

However, political and regulatory hurdles continue to cloud the outlook for ESG funds. A November Bloomberg News poll found that 65% of 691 respondents expected ESG funds to lead in the broader market in 2023, with 38% expecting them to “somewhat underperform” and 27% expecting to “significantly underperform.”

This negative sentiment could scare off investors in the short term, but the long-term case for ESG projects remains strong, especially as emerging markets continue to embrace them.

Assets are undervalued

Several major investment houses, including the US investment bank Goldman Sachs, have grown significantly more in recent months about making target investments in ESG companies in emerging markets that are not listed on developed market exchanges due to the relative lack of available data, which can cause ratings. And the valuations of these companies are suffering.

Companies in emerging markets tend to have lower ESG ratings than their counterparts in developed markets, according to MSCI, one of the world’s largest providers of ESG ratings.

In early January, Goldman Sachs invested $1.6 billion of client capital in the Horizon Environment & Climate Solutions I private equity fund, which is listed as a Article 9 product, meaning it complies with the EU’s stricter ESG standards.

Another reason for optimism about investing in ESG is the general recovery in emerging market stocks, driven by optimism about slowing inflation in the United States and the upcoming recovery from China, which experienced an economic slowdown in 2022 due to its zero Covid-19 policy.

Two weeks ago, emerging market stocks hit six-month highs after enjoying eight straight days of positive performance, the longest since November 2021, buoyed by Thursday’s announcement of slowing inflation in the United States.

Energy and climate imperatives

As the ongoing Russian invasion of Ukraine and Disruptions to global supply chains are expected to continue into 2023Many countries around the world have turned to hydrocarbons or coal to relieve energy shortages.

In 2022, hydrocarbon-producing countries reaped record revenues on the back of soaring oil and gas prices.

However, the issue of shifting to cleaner energy sources is becoming more pressing amid what the International Energy Agency considers a global energy crisis.

As governments adopt new policies to boost investment in clean energy and efficiency, there are huge opportunities for emerging markets that embrace the technologies and sources that will shape the energy mix of the future, strengthening the case for ESG investment.

From the perspective of strictly reducing emissions, NOCs probably have the biggest role to play because of their dominance in production, abundant reserves, and cost advantages.

In the Gulf, Saudi Aramco, the Abu Dhabi National Oil Company (ADNOC) and the Kuwait National Oil Company produced 19.3% of the world’s oil and held 28.7% of proven oil reserves in 2021, while Qatar Energy produced 4.4% of the world’s gas and owns 13.1% of the world’s reserves. Confirmed gas.

By focusing on reducing emissions and adhering to stricter Environmental, Social and Governance guidelines, these energy giants can help their countries achieve their climate goals.

Both Aramco and ADNOC are already deploying AI to make their operations more efficient, monitored, and reduce CO22 emissions, and the integration of green energy resources.

Meanwhile, a sharp rise in droughts and floods due to climate change in 2022 has led to food shortages in some emerging markets, This makes it necessary to adopt food and agricultural systems that are able to adapt to climate change.

Sub-Saharan Africa alone will need $15 billion in annual investment to support climate-resilient food and agricultural systems, according to the Global Adaptation Center’s 2021 report, which estimates the cost of inaction could reach $201 billion annually. .

The long term view

Besides relying on third-party ESG ratings, investors should keep in mind that emerging markets have different reasons for investing in sustainable projects than those in developed countries.

Emerging markets approach ESG as a way to address social priorities such as reducing poverty, accelerating economic development and providing affordable energy supplies, while more developed countries often have narrower targets such as achieving emissions targets.

This can create inconsistency around what ESG means in emerging markets, but it also presents opportunities, especially in conjunction with improved data reporting and a more comprehensive approach to evaluating emerging market companies that are not listed in developed markets.

Prioritizing ESG activities across many sectors is consistent with government sustainability goals and consumer demand, but also has the potential to improve business operations and create a virtuous investment cycle.

The ultimate question for ESG funds remains whether investors will recognize that emerging markets are moving in this direction.Nico Savafy, President of Moelex Indonesia, recently told OBG How Indonesia’s paint and coating manufacturers are promoting environmental and social protection through their activities and seeking new business opportunities in the space. “There is a real business opportunity associated with ESG activities, and the sooner companies embrace that, the better,” he said.

by Oxford Business Group

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