Europe: ESG Investors Turn to Emerging Markets, Defying Skeptics

A growing number of money managers in green finance are turning to markets not usually associated with sustainability.

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.

‘All Nonsense’

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, plenty 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.

Emerging markets government bonds with a weighting toward ESG have delivered negative returns of 6.8% so far this year, outperforming unweighted EM government bonds, which have handed investors negative returns of 7.4% over the same period to ETF index data that replicated the performance of fixed income markets.

Meanwhile, emerging-market investors are turning more selective on the whole amid speculation inflation is making a comeback. The MSCI Emerging Markets Index has slid almost 10% since its mid-February high.

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