Environmental, social, and governance (ESG) factors are attracting the attention of European asset owners that invest into emerging market funds—with good reason, according to the latest issue of The Cerulli Edge—European Monthly Product Trends Edition.
The traditional reliance of economies such as Russia, China, and Brazil on industrial sectors and raw materials has meant that their domestic companies have not scored well on ESG issues in the past, particularly on environmental considerations.
However, as emerging market economies have attracted more international investors—especially long-term allocators such as pension funds and sovereign wealth funds—local regulators have raised governance standards and companies are more willing to engage with shareholders, says Cerulli Associates, a global research and consulting firm.
For example, following the collapse of a tailings dam in Brazil that killed more than 240 people, an international consortium of institutional investors called for improved mining safety standards. More than 300 companies, including 37 of the 50 largest listed extractive miners, responded to the investors’ demands, pledging to make greater disclosures regarding their operations.
Fabrizio Zumbo, associate director, European asset management research at Cerulli, says the greater focus on ESG is translating into better performance for investors in emerging market funds. “ESG index performance certainly suggests that applying a responsible investment overlay can improve returns and reduce risk,” he says.
Zumbo cites various examples, including MSCI’s ESG Leaders Index. Over the five years to Nov. 8, 2019, the benchmark posted a 31.3% rise; the MSCI Emerging Markets Index gained 21.5% over the same period. In addition, the total assets under management (AUM) of Europe-domiciled exchange-traded funds (ETFs) dedicated to emerging markets have more than doubled since the end of 2016, rising from €33 billion (US$36 billion) to €68 billion as of the end of September 2019. Within this, demand for smart or strategic beta has increased, with assets in the sector also doubling from €1.5 billion to €3.0 billion over the same period.
• ETFs returned to positive territory in September, registering net new inflows of €17.0 billion, the latest available data shows. The best-performing sector was equities, which contributed net inflows of €11.5 billion; bond ETFs were second placed with inflows of €5.1 billion. Index funds attracted €7.8 billion of net new money during September, taking year-to-date (YTD) net inflows to €50.0 billion.
• After two consecutive months of negative flows, Europe’s asset allocation fund sector attracted net inflows of €382.6 million in September. Within the sector, asset allocation alternative recorded net outflows of €235.2 million and asset allocation posted net inflows of €617.8 million. YTD, the sector has seen net outflows of €23.1 billion.