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USS: ESG in emerging markets is a challenge - but “we should still try”

emerging_marketsESG ratings for companies in emerging markets was identified in a Funds Europe discussion recently as a challenge due to the lack of data.

Hitendra Varsani, executive director of index research at MSCI, said ESG ratings for emerging market firms “require a lot more consideration” due to data scarcity, and the sentiment was echoed by Mirko Cardinale, head of investment strategy at Universities Superannuation Scheme, who acknowledged there were challenges.

“But that doesn’t mean that we shouldn’t try,” Cardinale added.

“We know ESG factors such as climate change and controlling shareholder structures are important drivers of risk and return and we think that in terms of risk mitigation, understanding exposures to ESG factors is particularly important.” 

Xiadong Bao, emerging markets equity manager at Edmond de Rothschild Asset Management, said that international ratings agencies often have very limited ESG coverage on emerging markets companies. He said that of the roughly 7,000 names in the China equities universe, no more than 2,000 were scored highly by third-party ratings providers. 

Meanwhile, Heinrich Slabber, senior partner at Holborn Assets said ESG capital allocation in emerging markets should be a reward for actions and behaviours already taking place.

“Unfortunately, if you start allocating resources directly to governments, there is a lot of window-dressing going on. In Western Africa, fraud, corruption and window-dressing are rife,” he told fellow panellists at the Funds Europe emerging markets roundtable. 

Read the full roundtable here: Emerging markets roundtable: An uneven recovery

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