Investment - Articles - ESG scoring is unfairly punishing emerging economies

 Emerging markets (EM) are home to 85% of the world’s population — roughly six billion people. These are people that deserve and demand the same welfare and comforts of the developed world. Many developing economies do not lead with sustainable achievements today, yet they hold tremendous potential to contribute to a more sustainable future. Said another way, if the wealthy countries succeed in ‘net zero’ but we starve the poorer countries of required capital, the world will have made little progress.

 As stewards of capital, Torres believes asset managers should find ways to partner with the poorer and most rapidly developing economies to help them grow, consistent with a sustainable world, and achieve deserved levels of welfare.

 EMD provides some of the most interesting opportunities to investors, but ESG scoring methodologies have been constructed such that emerging economies are at an automatic disadvantage, making it harder to deliver the dual outcomes of saving the world and generating excess returns. “Nearly all responsible investors deploying capital in responsibly focused strategies, expect their investment will make a positive difference,” says Torres. “This is especially true when investing in emerging markets debt.”

 But Torres sees four key challenges: “Applying a conventional approach to ESG investing in EMD - where the investment strategy focuses solely on the best ESG opportunities - exposes weaknesses and poses challenges. There are four key structural features keeping investors from realizing their targeted outcomes when investing responsibly in EMD.”

 Torres believes that if investment managers change the way they frame their approach to ESG, investors will have a greater chance of using their EMD allocations to help improve societal outcomes.