So far, sustainable investment has mainly focused on opportunities within developed markets. However, we think the world’s emerging markets also present compelling opportunities that require specialist, local knowledge in order to be identified and captured effectively.
Additionally, there are several macro factors at play that further solidify the emerging market sustainable investment opportunity for the long term:
Emerging market growth invites a rethink on global challenges
Emerging markets are set to be the key beneficiaries of two global megatrends: urbanisation and demographics. It is estimated that 56% of the world’s population live in cities and over 80% of global gross domestic product (GDP) is generated from cities.
This trend is expected to continue, with the urban population more than doubling its current size by 2050, at which point nearly seven out of 10 people will live in cities. The majority of future urban population growth is expected to take place in emerging economies.
At the same time, the world’s population is projected to reach 8.5 billion and 9.7 billion, by 2030 and 2050 respectively, from close to 8 billion in 2022. Some 99% of the population growth by 2030 is expected to be in emerging economies. By 2050, 101% of the population growth is expected to be from emerging economies, with that in developed economies declining by 1%.
These trends support economic growth and wealth creation in terms of consumption, connectivity and innovation. However, there is now a global appetite to see how this economic activity in developing markets can address – rather than exacerbate – ongoing global challenges such as poor labour practices, pollution, resource scarcity and climate change.
Emerging markets face a huge sustainable development funding gap
There is a rigorous global effort to tackle perennial challenges such as poverty, inequality, climate change, environmental pollution and resource scarcity. This was established in 2015 with the launch by the United Nations General Assembly of its 17 UN Sustainable Development Goals (SDGs), plus 169 underlying targets. Unanimously adopted by the 193 UN member states, the UN SDGs are the first truly global framework for action to achieve a better and sustainable future for all.
The timetable for the UN SDGs is an ambitious one: it’s hoped that all goals will be achieved by 2030, with progress subject to annual monitoring. But meeting them in this timeframe presents a significant funding gap that can’t be met by government spending alone, especially in lower-income economies. That gives rise to a major financing role for private capital – and therefore a significant opportunity for investors.
The United Nations Conference on Trade and Development (UNCTAD) estimated in 2014 that globally an average of $6trn is required annually from 2015 to 2030 to finance the UN SDGs, with $4trn of this requirement in emerging markets.
Although some progress has been made since 2015, insufficient financing remains a major barrier and it is most acute in emerging markets. The Organisation for Economic Cooperation and Development (OECD) estimates that the funding gap between the annual financing requirement to meet the UN SDGs by 2030 and current investment levels increased by 56% to $3.9trn in 2020, from $2.5trn pre-Covid-19, largely due to Covid-19 creating additional capital needs and reducing existing funding.
Societal/regulatory pressures are driving corporate stewardship
Across emerging markets, there has been a wave of interest in corporate stewardship led by local government policymakers, shareholders and other stakeholders.
Stock exchanges are asking for more disclosures from their corporate constituents – albeit this is primarily on a voluntary basis at this stage. To attract inward investment, many countries are adopting global frameworks such as the World Bank’s Ease of Doing Business indicators. Companies themselves are increasingly open to engagement.
The right insight and process is essential
The combination of economic growth, the need for private capital to help fund the UN SDGs and rising corporate standards provide a compelling sustainable investment opportunity for emerging market participants. But the move to further improve environmental, social and governance (ESG) standards in these markets is a work in progress.
Given the diverse corporate practices and varying levels of policymaker engagement across markets, this is an area that requires first-hand corporate access, deep local knowledge of individual markets and a robust stock selection process to identify the most impactful sustainable opportunities – including those with potential for future improvement.
Andrew Ness is portfolio manager of the Templeton Emerging Markets Sustainability fund. The views expressed above should not be taken as investment advice.