ESG Has So Far Been a Rich World Phenomenon. But Emerging Markets Are Catching Up.

Investors weigh in on the importance of ESG in these markets and investment opportunities in a post-pandemic world.

(Dwayne Senior/Bloomberg)

(Dwayne Senior/Bloomberg)

Emerging markets aren’t what come to mind first when allocators think about investing in companies based on environmental, social, and governance goals.

But the pandemic has accelerated the adoption of some of these objectives, especially the “S” in ESG.

Teresa Barger, co-founder of Cartica Management, said the way companies treat their employees has become a critical factor in the valuation of their shares. Barger, who spent 21 years at the International Finance Corp. before going out on her own, should know. Cartica has a long history of applying activist techniques to companies exclusively in emerging markets. In fact, the firm, founded during the global financial crisis, makes money by persuading companies to fix their corporate governance issues, and identify and improve environmental and social risks.

Barger said companies that weren’t providing safety measures for factory workers, for example, saw their shares tumble during the pandemic. On the flip side, companies such as retailer Magazine Luiza in Brazil, which isn’t currently in Cartica’s portfolio, saw their prices skyrocket after announcing they wouldn’t lay off workers and that some executives in the firm, including the CEO, would not be taking a salary. Magazine Luiza, which runs both brick-and-mortar and e-commerce, also provided accommodations for its employees and their families. 

Barger said her firm has a “secret weapon” when it comes to ESG in emerging markets. “There are 400 different rating companies to rate ESG… it’s a complete free-for-all,” she says, explaining that ratings are still in a nascent state. Barger said Cartica does an “integrity check” with their portfolio companies, making sure they are creating sustainability committees on boards to report on what they do and to improve their practices.


Highlighting a pulp and paper firm in Latin America that Cartica was invested in, Barger explained that the company thrived because decades ago management made the smart decision to invest in mosaic forestry, a key element in biodiversity.

ESG is fundamentally different in emerging markets than it is in Europe and the U.S., in part because of the unwritten pact between some private companies and the communities in which they operate. This can be good for investors.

“They are in very poor countries. In most of the countries we work in, there is a deep feeling that it was incumbent upon private companies to do their part for the social good of the countries they’re in,” issues that developed countries aren’t faced with to the same degree, Barger said. Most recently some of these companies have stepped up to provide care, testing centers, and medical equipment for Covid patients.

Other investors in emerging markets echo similar sentiments. “What we’re looking for are companies that have a lending model that is designed in a way that can serve underbanked clients and therefore able to grow given the unmet demand,” said Bryan Wagner, partner at Creation Investments in Chicago. Creation invests entirely in financial service companies in emerging markets — credit, savings and insurance, sectors that are highly underdeveloped in these countries.

“If our companies are successful, in terms of making good loans and serving those clients well, we’ll be very successful as investors — we’ll have very good returns — and along the way we’ll have very significant impact.” Creation recently led a $20 million investment in Chile-based AVLA, whose financial technology unit made more than $200 million in housing loans and issued more than $70 million in securitization bonds.

To be sure, there are ESG concerns that are even more prevalent in emerging markets than they are in developed countries, such as the lack of transparency and reporting standards. “There’s no clear-cut black and white difference between U.S. and EM ESG standards,” said David Chao, a global market strategist at Invesco. “But some notable concerns on ESG development in EM include inconsistency in quality and format of ESG disclosure, immature regulatory frameworks and lack of coverage by third party ESG research providers.”

Transparency also depends on the sector. For Creation’s companies, which are in India, Mexico, Peru, Chile, Brazil, and Southeast Asia, transparency is a requirement in these jurisdictions because of their sector. Not only in the ways in which they file operational data but through reports that go into impact such as job creation and retention, gender diversity of clients, and [addressing underbanked issues in rural areas]. “We view the regulators as another stakeholder that is complimentary to the role that we’re going to play on the board.”

Jack Nelson, portfolio manager in the Sustainable Funds Group at Stewart Investors, underscores how some companies are addressing the needs of small and medium-sized businesses by providing customized solutions to challenges. One example is Mercado Libre in Argentina. “...historically in Latin America bank fees have been very high and small businesses have been unable to access sufficient finance. So in order to support its clients, Mercado Libre launched its own payments business which is now expanding into lending to SMEs,” Nelson said.

What’s in Store for Emerging Markets In a Post-Pandemic Era?

The ESG efforts come at a time when investors are seeing attractive investment opportunities overall in emerging markets as a result of the pandemic.

“EM stocks have trailed developed market stocks so far this year, but the performance gap is narrowing,” said Chao. For the first time since January, the MSCI Emerging Markets index last month outperformed the MSCI World index, and exceeded it by an annualized 2.4 percentage points in 2020. “I think that EM stocks remain attractive and that they should perform well for the rest of the year despite some of the noise from the recent hawkish Fed statements,” he added.

In the last few years more digitally disruptive companies have gone public, Barger said. “This is partly because private equity has been concentrated in a few places, specifically the U.S., Europe and China. So the non-Chinese companies go public earlier and that’s very cool for us.”

The pandemic also accelerated the digitization of companies that Barger called the “stay-at-home stocks.”

But the biggest change might be the availability of high-growth companies in a wider variety of countries in emerging markets. “They’re medium-size, so there’s still enormous scope for them to grow and to become mega-caps,” said Barger.