Sustainable Investing Series in association with BNP Paribas Asset Management

Investing for tomorrow: ESG in emerging market debt

For professional and institutional investors only

By L. Bryan Carter, Head of Emerging Market Fixed Income and Helena Vines-Fiestas, Head of Sustainability Research & Policy, BNP Paribas Asset Management

Investors increasingly consider environmental, social and governance (ESG) factors alongside traditional financial risks in investments. But many investors balk at the idea of using ESG criteria when investing in emerging markets (EM).

Just a decade ago, most countries facing fragile situations (whether political, social or economic) were low-income. The situation has improved with human development indices and other metrics demonstrating significant progress as many countries have graduated to middle income status. If we look ahead, some of the poorest countries with the lowest ESG scores may in fact produce the largest improvements.

Without question, many EM countries are departing from a lower base. Many of these countries arguably face the lowest hanging fruit in terms of gaining environmental efficiencies, safeguarding social goods and improving institutions of government. But these are precisely the countries that are most in need of long-term responsible investment to stimulate economic growth, job creation and strengthen their economic foundations.

These countries harbour the best set of ‘long-term improvers’, capable of generating outsized growth and asset gains for patient investors. Demographic trends and a growing middle class in many of them are generating rising demand for consumer goods, infrastructure, services and agribusiness, which provide new opportunities for investors.

Why mould this asset class into an ESG framework? We at BNP Paribas Asset Management do this not because we can demonstrate past returns from ESG factors, but rather we believe there is a moral imperative that drives our investment ethos to concentrate fiduciary assets in sustainable investments. This is driven by who we are as a firm, our role as first among peers in ethical investing, our long-term investment horizon, and our overarching risk mitigation philosophy.

It is our conviction that the future will not look like the past. There is no longer just a single EM group, with poor countries converging to industrialized status slowly and surely over time, and advanced EM countries graduating to developed countries.

The reality is different. Some countries are evolving in a positive direction in improving standards of living, policy frameworks and democracy; while others are regressing in terms of policy trajectories and quality-of-life factors.

Here, an ESG framework helps us separate the wheat from the chaff, applying a forward-looking focus on long-term success that is different from our daily, alpha-oriented investment process. Such an approach sends a clear signal to EM countries of investors’ focus on sustainability.

In short, there are two ways to generate alpha: either overweighting the champions or underweighting the pitfalls. EM investing is not just about finding the best markets; it is also about avoiding the worst ones. Long-term sustainability, in our belief, is synonymous with minimizing crisis or 'blow up' — which are, arguably, harder to predict. Further, we cannot rely on past cycles and back-testing, instead we need a view on what will matter going forward. At the same time, investors increasingly expect asset managers to have ESG lenses. Asset holders' ethos and views are increasingly shaping the industry. The desire for ESG-tailored investing is driving a more innovative and nuanced implementation of ESG research.

This article is second in a series on Sustainable Investing by BNP Paribas Asset Management. The next instalment will continue to explore how to integrate an ESG framework into emerging market debt investing.

Disclaimer: This material has been prepared and issued by BNP PARIBAS ASSET MANAGEMENT Singapore Limited (BNPP AMS)* and BNP PARIBAS ASSET MANAGEMENT Asia Limited (BNPP AMA)**. It is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such. The content has not been reviewed by the Monetary Authority of Singapore (“MAS”) or the Hong Kong Securities and Futures Commission (“HKSFC”). It is produced for information purposes and does not constitute any offer or investment advice. Investors should seek independent professional advice before investing, or in the absence thereof, he/she should consider whether the investments are suitable for him/her. Opinions included in this material constitute the judgement of BNPP AMS and BNPP AMA at the time specified and may be subject to change without notice. BNPP AMS and BNPP AMA are not obliged to update or alter the information or opinions contained within this material. Investments involve risks. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. Investors should refer to the offering document for further details including risk factors. *BNP PARIBAS ASSET MANAGEMENT Singapore Limited - Registered Office: 20 Collyer Quay, #01-01, Singapore 049319. Company Registration No:199308471D. **BNP PARIBAS ASSET MANAGEMENT Asia Limited: 17/F, Lincoln House, Taikoo Place, Quarry Bay, Hong Kong.

Date

11 Jan 2019

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