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Does sustainable investment work in emerging markets?

Sustainable investment is well established in the West, but there are those who doubt its viability in emerging markets, since they must deal with more transcendental issues. In fact, experience shows that emerging markets represent both a huge investment opportunity and a set of risks and challenges in terms of environmental, social and corporate governance (ESG).

According to Masja Zandbergen, director of integration of ASG criteria of Robeco , there are many remains that these countries have ahead such as deforestation, the use of child labor, low wages, nutrition problems in the population, high poverty rate or lack of resources. All this causes that no other issues arise such as solar energy or electric vehicles.

"So, what is the point of trying to invest in a sustainable way in these areas?", Zandbergen, who considers that all these problems make adopting ESG factors is even more important when it comes to building portfolios of emerging markets, that above all show where to look for the most advantageous values.

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"Its effect may be even greater. According to the studies carried out, adopting ESG factors in developed markets has a positive effect on the financial results of companies in 38% of cases, while in emerging markets this effect occurs in 65% of cases. And focusing on the factor of corporate governance has an even greater influence, "argues Zandbergen.

How to invest?

In the opinion of this expert, one way to create funds from emerging markets that are more sustainable is to adopt a quantitative approach using the investing factor. In this way, "a portfolio is built 20% more sustainable than the reference index, with a footprint 20% lower in terms of water consumption, CO2 emissions, waste generation and energy consumption. In addition, this method uses a broad list of exclusion based on values, through which companies from sectors such as coal, tobacco, games of chance or firearms are left out, "says Zandbergen.

From the manager point out that it is also important to combine various strategies of emerging markets for equities, using both a fundamental approach based on traditional ASG factors, and a quantitative approach oriented to factors such as low volatility, when there are markets that offer similar returns but with less risk.

SUBMITTED BY By Funds Society, Madrid