European pension funds and sovereign wealth funds investing in emerging markets are driving up environmental, social and governance standards in the countries, according to a report.

As reported by our sister title, European Pensions, The Cerulli Edge – European Monthly Product Trends Edition found that as emerging markets have attracted more international investors, in particular pension funds, local regulators have raised governance standards and companies are more willing to engage with shareholders.

This is a change from the past when there was a 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 ESG issues in the past, particularly on environmental considerations.

Cerulli’s report highlighted that 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.

As a result, 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.

Commenting, Cerulli associate director, European asset management research, Fabrizio Zumbo, said 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 said.

Zumbo cites various examples, including MSCI’s ESG Leaders Index. Over the five years to 8 November 2019, the benchmark posted a 31.3 per cent rise; the MSCI Emerging Markets Index gained 21.5 per cent 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 €33bn to €68bn 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 €1.5bn to €3bn over the same period.

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