CONTRIBUTORS
Andrew Ness
Portfolio Manager, Franklin Templeton Emerging Markets Equity
United Kingdom
Preyesh Patel
Senior ESG Analyst,
Franklin Templeton Emerging Markets Equity
Preview
Sustainable investing is more than about seeking companies with top-notch environmental, social and governance (ESG) profiles. It is also about uncovering companies that are improving their ESG footprints, and their disclosures go a long way toward signaling and evidencing such progress. Yet, across emerging markets (EMs), corporate ESG disclosures are uneven and broadly lag those in developed markets (DMs). Investors relying solely on published information to assess EM companies’ sustainability efforts and ambitions risk missing the mark significantly.
Therein lies the opportunity for investors who can look beyond the surface. In our decades of investing in EMs, we have developed insights into companies’ sustainability journeys through our local research and longstanding engagement with managements. We distil three key observations from our analyses and experience:
- EM companies are not entirely behind their DM peers in ESG disclosure. Firms in select EMs have been more transparent. Also, encouraging is the increasing openness that EM companies have displayed in recent years. Our local presence is an advantage here as we are often able to establish deeper insights though our relationships with companies.
- Market-wide ESG policies and initiatives are gaining ground in EMs. We expect this trend to boost companies’ ESG disclosures and public accountability. In fact, we have been heavily involved in driving the agenda around policy advocacy.
- Investors can advocate better disclosures and other improvements through engagement with companies, regulators and other stakeholders. The relationships of trust we have built often give us the leeway to discuss material issues and help shape change.
We believe that some of the most overlooked sustainable investment opportunities in EMs lie in companies making positive ESG transitions. Evolving ESG disclosures—and their impact on investors’ ability to perceive and position for these transitions—will be key to watch.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. Investment in the commercial real estate sector, including in multifamily, involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in infrastructure-related securities involve special risks, such as high interest costs, high leverage and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Diversification does not guarantee profit nor protect against risk of loss. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.