Investing in emerging markets equities with high environmental, social and governance (ESG) ratings leads to better performance, analysis suggests.
The study, issued by NN Investment Partners (NNIP), shows companies in emerging markets with high ESG ratings deliver higher risk-adjusted returns than those in developed markets, and company ownership structures are the most important corporate governance driver.
It goes on to conclude that portfolios should be adjusted to take account of countries and sectors having a wide variety of ESG ratings as a result of different cultures, regulatory regimes, ownership structures and business practices. An unadjusted portfolio of high ESG-rated stocks would inevitably have a large overweight to certain countries or sectors, skewing performance.
The findings run contrary to the widespread perception that firms in emerging markets give little or no consideration to ESG policies and practices, which are increasingly considered an essential requirement for companies in developed markets.
Nathan Griffiths, senior portfolio manager in NNIP’s emerging markets equity business, said that while ESG challenges in emerging markets can be very different to those in developed markets, if a company makes a meaningful effort to improve its ESG policies it can, on average, expect better relative share price performance.
NNIP conducted the research in conjunction with the European Centre for Corporate Engagement. It tracked data on around 700 companies from January 2010 to October 2015.
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