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Such capabilities can identify opportunities as well as risks, making EM corporate bonds a rational and attractive proposition-not only for investors who are explicitly targeting responsible-investment outcomes but also for those who are primarily concerned with capturing competitive risk-adjusted returns. In particular, a 360-degree approach to collaboration across teams of economists, analysts, portfolio managers and specialists in responsible investing ensures the collection and assessment of relevant and timely information. However, it’s possible to identify and manage the ESG and other risks associated with EM corporates, given a sufficiently robust research methodology and investment process. Myth #3: Applying ESG to EM corporate bonds is too complicated.īecause ESG risks in this arena can seem impossibly opaque or complex, many investors don’t do the extensive due diligence required to differentiate within the EM corporate sector. But sorting out good from bad governance is indeed tricky, which brings us to our third myth. Thus, governance issues shouldn’t weigh too negatively for EM corporations compared to their DM counterparts. These initiatives resulted in a significant decline in the company’s cost of funds, and investors in the company’s bonds during this period saw their holdings outperform. ContourGlobal, a UK-based power generation company with operations in Brazil, Bulgaria and Africa, enhanced its governance and environmental risk profiles by carrying out an initial public offering-making it subject to increased scrutiny and standards of transparency-and committing to build no new coal plants. For example, efforts by conscientious companies to improve their governance can pay off handsomely for investors. When the extent of its poor governance came to light in 2019, it was placed in administration and bondholders suffered an 80% loss.īut the stakes can be high in a positive way too. The company understated its borrowings by US$4 billion over several years. NMC Healthcare, a private healthcare provider based in the United Arab Emirates, illustrates how governance risk can adversely affect investors. Sorting out good governance practices from bad ones is crucial to successful investing, because the stakes can be high. These include the utilities sector, where many companies are transitioning to renewable energy sources, and the consumer sector, including healthcare and some e-commerce enterprises (Display). In just the last five years, the EM corporate bond universe has shifted away from traditional polluters such as oil and gas producers toward more ESG-friendly sectors. It’s true that EM corporations were once heavy polluters, but that’s no longer the case. The first common misconception is that EM companies are all old-industry bad actors. Myth #1: EM companies are bad actors when it comes to the environment. In our view, investors need to cut through the confusion around ESG in EM to access a rising sector with a compelling risk/reward profile.īelow, we debunk the four most common ESG misconceptions about EM corporates-from wanton pollution to hopeless complexity. Unfortunately, many investors hesitate to buy EM corporates because they’re holding onto outdated notions about these issuers-especially when it comes to environmental, social and governance (ESG) risks. For bond investors who’ve had a tough time finding opportunities for attractive yield and potential return, that’s good news. With US$2.7 trillion outstanding across more than 600 companies, it’s now larger than the entire EM sovereign sector and is equal to the US-dollar and euro high-yield markets combined. As one of the fastest-growing bond sectors, emerging-market (EM) corporate debt has become too big to ignore.