Some EM countries are making strides in addressing ESG considerations which can help mitigate risk but also offer improved earnings and stock appreciation. In recent months, the Russian war, and regulatory changes in China have reminded investors that EM companies may still be subject to external macro governance risk.
Third-party data providers, such as Sustainalytics, ascribe ESG risk to a higher level of companies in the EM index than in the US, or ACWI ex-US index. There are two main reasons.
One is that EM companies don’t disclose specifically in the way that these third-party data providers are asking them to disclose information, which in some cases leads to a negative rating, even though they might provide the information in a different format. This creates space for active management to step in, do the analysis and add value.
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