Investors have been urged to look at emerging markets as a force for climate change, despite 10 years of “misery and discontent”.
Delegates at the Pensions and Lifetime Savings Association’s ESG conference in London were told there were compelling reasons why the world’s developing regions could help pension funds meet climate objectives.
Fiona Manning, fund manager at Premier Miton, said they had been right to be wary of emerging markets.
She pointed out there had been a decade of outperformance in the early 2000s, followed by “10 years of misery and discontent”.
Manning said the drivers of these “glory days” were strong US dollar earnings and US growth - the result of urbanisation and the globalisation of supply chains.”
Despite a subsequent 10 years of slow growth, Manning claimed emerging markets was now an exciting area for those looking to further climate change objectives.
Although debt levels in emerging markets are higher or at similar levels Manning said this obscured other factors including a lessening dependence on the US dollar which had helped drive a growth in available domestic capital.
“Emerging markets learned their lessons from a painful episode in 2013, they reacted better to the inflationary pressures of covid.”
Emerging market allocation
Manning said emerging markets made up 88 per cent of world’s population and over the next five years were predicted to account for 43 per cent of the world’s collective Gross Domestic Product.
Their share of world financial wealth has increased to 40 per cent compared to 13 per cent in 2013.
“Many of these economies also have a reluctance to increase their carbon footprint. People are thinking about portfolio level carbon.”
Manning pointed out emerging markets have contributed two thirds of current global emissions, but that a lot of this was by proxy; many of the products consumed in developed countries are produced in emerging markets either in terms of parts or final manufacturing.
She said: “We still need sustainable development and we can’t ask for emerging markets to stop urbanisation and development.”
Instead investors needed to adopt an active management approach, Manning said, adding: “Index investing will result in an index carbon footprint.”
Emerging markets were committed to innovating and allocating capital to solving the challenges of climate change but investors needed to look at individual opportunities.
Manning added: “Investing in emerging markets is the greatest construction project we have seen for decades. Allocating actively can deliver financial returns and positive sustainable outcomes.”
Samantha Downes is a freelance journalist
