Fund bosses in Europe’s North, where climate-friendly investing has gone mainstream, have started looking much further afield to find cheap assets they say will eventually meet their environmental, social and governance goals.
Nordea Bank Abp’s $450 billion asset management unit is among those trying out the strategy, and has just launched a fund targeting ESG assets in emerging markets.
“We felt it was a compelling idea,” said Thede Ruest, head of emerging debt markets at Nordea’s investment management unit in Copenhagen.
He expects the strategy to deliver “slightly better yield without too much risk-taking.” He also hopes it will “make a difference where it arguably will matter more.”
Nordea’s Global Green Bond Fund will invest at least 70% in green bonds, while the rest will be in conventional bonds issued by sustainable businesses, as well as social and so-called sustainability-linked debt. Of the total fund, about a fifth is currently allocated to emerging markets.
Money managers who have already spent time digging around for sustainable investments in emerging markets say ESG is definitely gaining a foothold, but from a rocky beginning.
“In the past, a great deal of companies didn’t even know what the acronym ESG stood for,” according to Burton Flynn and Ivan Nechunaev, fund managers at Terra Nova Capital, which advises the Evli Emerging Frontier fund. “When we would explain, many would push back saying that it’s all nonsense and some would outright laugh at us.”
The two recall a 2019 meeting in which a chief financial officer “stared at us blankly when we asked about their ESG policy.” After explaining what it is, “she burst into laughter.” The head of a stock exchange in another frontier market “asked sarcastically, ‘do you guys really believe in wind energy?’”
But things have already changed and now, it’s “quite rare” to come across firms that are unaware of the demands being made by ESG investors, Flynn and Nechunaev said.
Ruest at Nordea says a major worry now is that some firms aren’t as clean as they claim.
“It’s a nightmare of mine that we should expose ourselves to greenwashing,” he said. “That is one of the biggest fears I have.” He says that fixed-income investors tend to enjoy more protections than others, but asset managers still need to come up with their own litmus test to avoid ESG fakes.
“What we always look for is to have credibility in the issuer, we want to see credible plans in the whole transition of the issuer,” Ruest said.
But there’s a school of thought that argues companies in emerging markets are actually less likely to be guilty of greenwashing than their developed-market peers. That’s because they’ve been under less pressure to disclose ESG metrics, and aren’t used to having to pretend they’re more virtuous than they are, according to Karine Hirn, founding partner and chief sustainability officer at East Capital in Stockholm.
Frontier markets tend to provide “amazing” opportunities for ESG-focused active investors, Hirn said. She’s developed a grading system that measures a company’s expected transition toward a more sustainable business model to guide investment decisions.
Rather than going with established names she says, “You want to invest in companies that are improving in terms of ESG.”
Mattias Martinsson, chief investment officer at Tundra Fonder, says that “if you really want to do in-depth ESG analysis in these markets, you need to spend the time and do it on a company by company basis. The main challenge today is still transparency in these markets.”
Flynn and Nechunaev say ESG investors face increasingly crowded markets, in which sustainable assets fly off the shelf.
“Of course we like best-in-class ESG companies,” they said. “But we really love to invest in companies with opportunities for improvement.”
“Investing only in companies that have high ESG standards doesn’t fix problems,” they said. And companies with “stellar ESG reputations” tend to be expensive, which could add to the risk of an “ESG bubble.”
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