Several weeks before the Covid-19 lockdown, we took part in a number of meetings working in london with global fund managers whose investment strategies integrate ESG (Environment, Social, Governance) factors.
The discussions raised many interesting observations and conclusions.
However, what struck me probably the most was one asset manager's unequivocal declaration: “We do not lower the standards for emerging markets compared to developed markets. Risk is risk.”
His statement casts new light on capital market investments.
In the classical model of investing on the main city market, investment portfolios are differentiated with respect to the region of allocation. Assets of developed market funds take into account 60 per cent of all global investments. Based on a number of different criteria, emerging markets are considered less attractive and a higher risk. However, once the investment paradigm shifts and all sorts of financial markets are considered on a par according to the ESG criteria, the level of investments in emerging markets can grow.
To prove the point, consider recent statistics of sustainable investment. Based on a Morningstar report, global assets of ESG funds reached 40.5 trillion US dollars after 2022. In the fourth quarter of 2022 alone, 150 billion $ $ $ $ was invested in ESG funds, mainly in Europe (120 billion euros).
Three from four sustainable equity funds outperformed market benchmarks in 2022 while 25 out of 26 ESG index funds outperformed broad market funds. Long-term returns point in favour of sustainable investments, as an example the MSCI Emerging Markets ESG Leaders index gained 150 per cent in the last Ten years, when compared with returns of 59 percent generated through the broad MSCI Emerging Markets index in the same decade.
A new investment trend
Public companies for auction on Central European exchanges are following a new investment trend. Companies increasingly provide stakeholders with non-financial reports prepared under the highest global standards.
As an effect, international investors obtain access to crucial information relevant to their decision-making models. Companies in France, Germany or Sweden just like companies in Poland, Czechia and Hungary which publish ESG reports are assessed from the same criteria and may raise the same capital.
Importantly, investment banks' assets integrating ESG factors already account for 30 per cent of the total investments, expected to rise to 100 percent of some domain portfolios within 5-10 years.
Alternatively, companies can raise growth funds by issuing green bonds. The initial Polish companies successfully placed debt on the capital market this past year, expecting to use proceeds to invest in or refinance alternative energy, clean transport, and environmental protection projects.
Regional funds having a focus on green investments emerged on the CEE markets with a climate-friendly mission setting new trends in favour of lasting changes.
The role of exchanges
Stock exchanges, which match issuers and investors, play a huge role to promote sustainable investments. Communication between exchanges and investors help to identify investors' interest in non-financial information, which helps investors prepare ESG reports. Consequently, investors get the key they need to run analyses making investment decisions.
The process is based on solutions dedicated to companies, including reporting manuals, trainings and workshops. According to the Sustainable Stock markets Initiative which promotes sustainable financing, 61 exchanges all over the world have published ESG reporting guidelines for companies, including CEE exchanges in Budapest, Riga, Tallinn, Vilnius and Warsaw.
New regulatory challenges associated with non-financial reporting will within the next five years bolster the importance of sustainable investments.