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October 11, 2012

Assets Committed to Emerging Markets on the Increase
    by Robert Kropp

A new survey by EIRIS suggests that while sustainable stock exchanges increase investor confidence in emerging markets investment, poor corporate attention to environmental, social, and corporate governance issues remains a barrier.

SocialFunds.com -- It should come as no surprise to investors and others that by 2020, an estimated 85% of the world's population will live in developing nations. What may be more surprising is the fact that in 2012, emerging markets made up more than half of the global gross domestic product (GDP) for the first time.

Combined with the persistent low returns and volatility prevailing in developed markets since the financial crisis, the growth of emerging markets makes them an increasingly attractive investment strategy. A new survey by EIRIS seeks to determine the factors considered important to investors in crafting a strategy for investment in emerging markets.

EIRIS describes the survey as a successor to a 2009 report from the Emerging Markets Disclosure (EMD) Project of US SIF: The Forum for Sustainable and Responsible Investment. Finding that relatively few emerging market companies report effectively on environmental, social, and corporate governance (ESG), the earlier report recommended that investors sign onto the Investor Statement on Sustainability Reporting in Emerging Markets.

The Investor Statement concluded, "The signatories to this statement believe that the next generation of leading companies will distinguish themselves through their commitment to sustainability, as demonstrated through robust sustainability reporting, and will be correspondingly rewarded by the market."

In its new survey, EIRIS advises caution "when comparing the 2009 figures to the 2012 ones as there were only two respondents to the 2012 survey who also completed the 2009 survey." A total of 44 asset managers, asset owners, and index providers responded to the 2012 survey.

Nevertheless, the survey indicates that investment in merging markets is increasing. The assets under management of the respondents totaled nearly $2.4 trillion, a 30% increase over assets reported in 2009. Around $161 billion, or approximately 7% of those assets, were allocated to emerging markets in 2012.

Sustainable stock indexes in Brazil and South Africa "have leapfrogged their developed-world peers by creating advanced ESG listing requirements, sustainability indices and other products to drive disclosure," EIRIS found. The two countries ranked atop the survey's listing of top performers on emerging markets disclosures, followed by Turkey, Malaysia, and China.

"South Africa and Brazil are leading the way with ESG initiatives which developed markets could well learn from," Josh Brewer, report author and Head of Financials and Technology team at EIRIS, said.

The greatest number of respondents, on the other hand, report that they invest in companies from China; "unsurprising," EIRIS observes, "given its development into the second largest global economy after the US." China has also increased investor confidence by greater attention to sustainability issues in its most recent five-year plan, as well as changes to listing rules that encourage better ESG disclosure by companies.

The stock index most frequently cited by respondents was the MSCI Emerging Market index, which cover over 2,700 large, mid, and small cap securities in 21 emerging markets.

Despite the signs of increasing attention to investment in emerging markets, investors remain concerned over the quality of sustainability reporting by companies. Seventy-eight percent of respondents mentioned the lack of corporate ESG disclosure as a key challenge to investing in emerging markets.

"Investors identify the environment, compliance with international norms, such as human rights, and corporate governance as their core sustainability concerns in emerging markets, just as they are in developed markets," the report states.

On the other hand, developments such as sustainable stock exchanges and indexes "are driving improvement in ESG disclosure in emerging markets and helping governments to address the environmental and social challenges these nations face."

"Lower returns and increased risk and volatility in developed markets has potentially resulted in a recalibration of risk/return ratios that make emerging markets more attractive to investors," Brewer said. "Our report highlights the enormous investment potential which emerging markets offer, but also the significant ESG risks that need to be addressed by investors into these markets."

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