In this second piece in our article series, we highlight the disproportionate impact that climate disruption could have – and is already having – on emerging market economies.
A report from the Global Climate Risk Index finds that eight out of the ten countries most affected by the quantified impacts of extreme weather events in 2019 belonged to the lower-middle income category (Figure 1).1
What’s more, when disasters do occur, emerging markets are often less financially equipped to deal with the effects.
Source: Global Climate Risk Index Report, 2019.
However, while the headlines are often full of statements about corruption, social inequality and polluting industry, emerging market economies can also be a hub of exciting ESG potential.
The use of onshore wind power in Brazil and solar power in India and Africa, for example, highlights opportunities to democratise energy in an environmentally sustainable way for growing populations. Many simply aren’t aware that emerging markets have these renewable energy resources at their disposal.
What’s more, Craig Altholz (Client Portfolio Manager, Emerging Market Credit) notes that ‘steering private capital towards countries willing to improve ESG conditions can entice other countries to address ESG standards’.
A similar phenomenon is captured by Figure 2, which shows that ESG spending helps countries generate greater economic activity within their own borders, thereby initiating a positive feedback loop.
Source: Institute of International Finance, 31 December 2020.
That said, some challenges do remain. Elsewhere in this series, we’ve highlighted the fact that data issues don’t always make things easy for investors looking to assess the materiality of the risks for specific issuers.
While third party research providers like MSCI are excellent resources, their dependence on easily accessible public data means that their value from an investment standpoint is limited.
This is especially true in areas like emerging market debt, where obtaining relevant data can be more challenging. In the words of Gerald Evelyn (Client Portfolio Manager, Multi Sector Global Debt):
You need good analysts to add a qualitative overlay, and to fill in the gaps left by data deficiencies. And active engagement is critical.
At Invesco, our fixed income teams see engagement as a way to gather additional insights and raise issues of concern.
Our local debt team carries out approximately twenty country visits and over 100 engagement meetings each year. This includes direct contact with local policymakers and stakeholders, as well as participation in collective engagement initiatives like Climate Action 100+.
Engagement is at the heart of the team’s culture, and it’s a real advantage in a market where smaller competitors may struggle to get access to these key stakeholders.
The team recognises the importance of ESG factors in the context of performance, adding that ESG ‘increases the robustness and completeness of a manager’s investment process’.
Our hard currency team is similarly engaged, with positive results. They find that EM sovereign and corporate issuers have good reasons to care about ESG goals, with ESG investment reducing the cost of capital.
We know investors are living through an unprecedented period of market disruption and volatility. As we face these new realities, we think taking an unfixed approach to fixed income is an advantage.
From active to passive, from mainstream to innovative, we have the expertise, the strategies and the flexibility needed to match your objectives as markets evolve.
Having set ambitious national climate targets, the UK has been largely content to follow the EU’s lead regarding the Green Taxonomy, but there are divergences. Unlike the Europeans, British policymakers have put nuclear and hydrogen at the centre of their plans. There is further divergence at both the corporate and investment product levels.
The UK is leading the charge against climate change and has already made huge improvements compared to many of the world's largest polluters. With an economy focused on service industries, the UK’s carbon intensity has fallen over the last decade, and the government has announced various measures to accelerate the transition to net zero.
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Where individuals or the business have expressed opinions, they are based on current market conditions. They may differ from those of other investment professionals. They are subject to change without notice and are not to be construed as investment advice.
