HSBC sees major opportunities for ESG in emerging markets: “Where the alpha lives”

Bank releases ‘integration and materiality guide’ for emerging markets

Emerging markets are ripe for environmental, social and governance (ESG) improvements that will benefit investors, according to a major new research report from HSBC.

“In our view, ESG can arguably make the most difference to EM [emerging market] investors,” write the bank’s analysts in ‘Global ESG Sector Playbook: Profiting from Emerging Markets’.

The new research builds on its inaugural 170-page ‘Global Equity Strategy – Investing responsibly: The ESG Handbook’ published in December 2015 and last year’s ‘Global ESG Sector Playbook: Ignore at your peril’.

“This year we go a step further, and HSBC sector analysts lay out an integration and materiality guide for emerging markets (EM), across 19 sectors – from Agriculture to Utilities,” it says. The forward to the report is subtitled ‘Where the alpha lives’.

It continues: “EM economies have seen significant improvements in ESG metrics in recent years, and now have comparable rankings to DM [developed market] economies, which have seen easing ESG metrics. This has enabled EM ESG equity indices to outperform the MSCI EM regional index by 16% over the past five years, far higher than other DM regions.”

The analysis argues that a broad embrace of governance and stewardship codes across emerging markets “holds the possibility of improvement and further outperformance”.

HSBC finds that half of the key medium-term emerging market company value drivers are ESG-related. In some sectors, such as Industrials, Retail, and Mining, HSBC says, this proportion “is closer to 100%”.The bank outlined its ESG research capabilities in ‘ESG: Broadening our coverage of Environmental, Social and Governance factors’ in September 2016; its equity research reports now incorporate standardised ESG metrics.

The new report continues: “ESG has become widely accepted by the mainstream investment community. 

ESG is now too useful to ignore and too important for asset owners to overlook.

“It has become both too useful to ignore and too important for asset owners to overlook.” ESG data provides information about risk, trends, or opportunities “that investors are just not getting from mainstream financial data”.

The main contributors to the study:

  • Wai-Shin Chan, Director, Climate Change Strategy – Asia-Pacific
  • Ben Laidler, Global Equity Strategist
  • Daniel Grosvenor, Global Equity Strategist
  • Ashim Paun, Director, Climate Change Strategy
  • Lucy Acton, Analyst, Social and Governance
  • Charanjit Singh, ESG Strategist