While there’s still much work to be done, some developing economies are increasingly prioritizing sustainability and carbon reduction efforts.
That’s a long-ranging trend that could result in trillions of dollars of capital commitments, perhaps indicating compelling trajectories for exchange traded funds like the SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF (EEMX).
“Sustainable finance incorporates ESG principles into business decisions and investment strategies, covering issues from climate change to labor practices. It has become more mainstream in emerging markets in part because of pandemic-related financing needs, such as healthcare, as well as Latin America’s surge in climate-related borrowing,” according to the International Monetary Fund.
EEMX, which tracks the MSCI Emerging Markets ex Fossil Fuels Index, features exposure to five Latin American countries, including Brazil and Mexico, the region’s two largest economies.
Enhancing the allure of EEMX is the fact that the fund does what its name implies, meaning that it credibly excludes fossil fuel stocks, as the energy sector represents a scant 0.41% of the ETF’s portfolio. That’s relevant at a time when many advisors and investors are decrying greenwashing and mislabeling on ESG strategies.
That’s also beneficial because by essentially excluding fossil fuel stocks, EEMX reduces its exposure to state-owned enterprises (SOEs), which have long histories of disappointing emerging markets equity investors. Conversely, EEMX could be a credible idea for investors looking to pair sustainability with a play on growth avenues in developing economies, as the fund allocates 36% of its weight to the technology and consumer discretionary sectors, which are groups with scant SOE penetration. EEMX’s 24.27% weight to financial services stocks is also relevant on the sustainability front.
“Recent gains in ESG markets may be an important opportunity for emerging markets to access more stable funding sources and develop a broader and more mature sustainable finance ecosystem. With many of these nations highly exposed to climate hazards and already facing related transition challenges, private finance will play a crucial role in mitigating these risks and strengthening the financial sector,” adds the IMF.
Geographic diversity is also relevant because more emerging markets are embracing climate-related financing.
“ESG investments now make up almost 18 percent of foreign financing for emerging markets excluding China, quadruple the average for recent years. This raises questions about possible financial stability risks,” concludes the IMF. “The ESG ecosystem in emerging markets has grown not only in size but also broadened across other dimensions.”
Chinese stocks account for 30.76% of EEMX’s weight.
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