While the case for environmental, social and governance (ESG) investing is almost a no-brainer given the sector’s recent performance and despite stricter measures on cracking down on ESG funds, emerging markets might be on the opposite end of the spectrum. Or are they? This certain bond fund combines both worlds and has been doing quite well as of late, according to a recent Bloomberg article.
The obvious question might be what does the fund have? However, it’s what the fund doesn’t have.
“A top-performing emerging-market bond fund is avoiding investments in Russia, China and Saudi Arabia as the three countries score too low in its ratings for environmental, social and governance risks,” the article said. “The $1.5 billion Candriam SRI Bond Emerging Markets Fund has outperformed almost 90% of peers in the past three years and screens for ESG factors. The bottom 25% of countries on the fund’s ranking get blacklisted, no matter how big a role they play in the bond world.”
“ESG investing is gaining pace in the emerging-market debt space,” Magda Branet, deputy head of emerging-market debt at Candriam, said in an emailed response to questions. “Clearly investors will increasingly look to be compensated for ESG-related risks. They will demand higher risk premia from countries that score poorly in their criteria, or avoid some issuers altogether.”
Best of Both ESG and EM Worlds
This sounds all well and good, but where do U.S. investors get in on the action? Enter the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG) — the fund seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Emerging Markets ESG Leaders Index.
The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index, which is a capitalization weighted index that provides exposure to companies with ESG performance relative to their sector peers.
MSCI EM ESG Leaders Index consists of large and mid-cap companies across 24 EM countries. The Index is designed for investors seeking a broad, diversified sustainability benchmark with relatively low tracking error to the underlying equity market.
For investors who want the ESG performance, but also the EM diversification aspect in one fund, EMSG is a prime alternative as opposed to simply picking equities that give you exposure to both sectors. With the pandemic still affecting a majority of the globe, investors have to walk on proverbial eggshells when investing in EM.