“ESG: Improving Your Risk-Adjusted Returns in Emerging Markets” – GMO – March 2018

In March 2018 global asset manager GMO published a whitepaper entitled, “ESG: Improving Your Risk-Adjusted Returns in Emerging Markets” written by Binu George, a portfolio strategist for GMO’s Emerging Markets Equity team and Hardik Shah, the ESG Practice Manager at GMO.

The introduction to the white paper reads as follows:

“The demand for environmental, social, and governance (ESG) or responsible investing (RI) is growing at a rapid pace with nearly USD 23 trillion of assets being professionally managed under RI as of 2016, an increase of 72% since 2012 (Global Sustainable Investment Review 2014, 2016).  Despite increased investor interest and relatively higher risk exposure to ESG issues, the lack of breadth and depth in corporate sustainability disclosures has led to exaggeratedly low ESG scores and hitherto restricted rigorous application of ESG integration strategies to emerging market (EM) portfolios. With regulatory momentum moving toward more transparent, relevant, and accurate corporate disclosures, and the increased use of technology to capture and analyze data, this sustainability information gap is quickly reducing in many EM countries.

In Part 1 of this paper, we make the case that this cannot come too soon for EM investing as these countries are generally both more vulnerable to ESG issues and less prepared to deal with them. From an active manager’s perspective, the ESG scores in emerging markets encompass a wide spectrum, thereby offering another avenue to add value. In Part 2 we establish that both macro and micro ESG issues can substantially impact the earnings potential of corporations. We also highlight the benefits of developing a proprietary ESG assessment framework over a reliance on off-the-shelf ESG scores from vendors. We also demonstrate, using a case study, how one can integrate ESG risks and opportunities with traditional financial analysis to enhance the overall investment process. We conclude by underlining our conviction that although ESG signals are worth integrating in all strategies, there are some strategies in which these signals have a greater impact.”

You may read the white paper on the GMO internet site.