Looking for an edge in emerging
markets? Try environmental, social, and governance (ESG) investing.
Investors who picked stocks
based on ESG
factors in emerging markets over the last decade were likely to outperform those who did not,
according to a new report from Cambridge Associates.
The study, which compared the
performance of two MSCI emerging market indexes over the last three years,
found that the ESG index outperformed its parent index by a cumulative 12
percent on a total return basis. More than half of that outperformance was
attributed solely to ESG factors such as renewable energy and business ethics.
Further analysis of emerging
market companies indicated that companies with higher ESG ratings outperformed
in the preceding six-and-a-half years as well.
“Of the 367 basis points of
annualized outperformance achieved by the MSCI Emerging Markets ESG Index, some
199 basis points were attributable to ESG factors after we accounted for the
contribution of other factors such as country, currency, sector, and style,”
said Chris Varco, senior investment director for mission-related investing at
This finding, Varco continued,
refutes the “assertion that ESG factors are just proxies for other things,
rather than valuable investment tools in their own right.”
While evidence for ESG
outperformance in developed markets has been mixed—MSCI’s global ESG index
slightly underperformed its parent index—Varco argued that these factors are a
“key tool” in emerging markets.
“Investors in emerging markets
equities often focus on commodity prices, currency, and macroeconomic factors,
as well as domestic consumption trends, and they tend to underestimate the
value of this widely available information on the ESG strength of companies in
emerging markets,” he said.
The MSCI ESG index, for
example, weeds out state-owned enterprises, which feature prominently in
MSCI’s broader emerging markets index.
“Where underlying ESG risks are
higher,” Varco wrote, “the emergence of new robust datasets represents an
important tool in the stock selection process.”
Source: Cambridge Associates‘s “Evidence for Emerging Markets Equities”
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