Reshaping the world by being socially conscious in the emerging markets

June 2024 Updated

by Britte Darell, Chief Executive Officer of the ESES CSDs, CDB AG

Sustainable investing is getting a new boost – from the millennial generation. This has big implications for all markets, but particularly for the emerging world as well as all our efforts to create social inclusion.

I believe today’s younger investors are set to shape the investment marketplace in a whole new way. If my kids are anything to go by, sustainability is close to their hearts. They are socially conscious without a doubt.

They will be impossible to ignore. By 2023, millennials will make up 35% of the world’s workforce. Evidence shows they are more likely to want to make a positive impact than the previous generation.

I believe a lot of their attention will be on the developing world. They will look to invest an increasing proportion of their savings in emerging markets.

But both investing institutions and the markets they invest in will need to keep on driving risk out of the equation if the marriage of the two is to be a success.

Viewing emerging markets through an ESG lens

From an investor viewpoint, there are big pluses but also minuses.

Until the latest panic over a potential global trade war, the emerging markets enjoyed three years of positive investment flows. MSCI’s emerging markets index outperformed the world index by nearly 9% a year in that time.

But we need to acknowledge that many of the factors that make emerging markets attractive also bring risk. There is currency, and sometimes political, volatility. Levels of governance vary.

One way of mitigating that risk is to view these markets through an Environmental, Social and Governance (ESG) lens. ESG investing is not just pandering to good intentions, it can help investors avoid some of the pitfalls.

For instance, Petrobras, the big Brazilian energy company, is excluded from the MSCI emerging markets index as the result of a corruption scandal.

I believe ESG factors will assume increasing importance as the millennial generation becomes a force in the savings world. This is something that both investment managers and market authorities need to take into account.

Becoming a more appealing investment destination

Market authorities themselves can do a lot to help their case as an investment destination – and reduce the perception of risk attaching to them.

Having the right processes to manage the investment flows and the investor actions that follow is a key step in this process. Putting international-style legal, tax, regulatory and infrastructure frameworks in place allows investors to assess a market on its fundamental merits and not worry about logistical issues.

At CDB, we have worked with a number of countries to help them deliver market reforms. The end-state for many is to make their market ‘CDBable’.

Viewing emerging markets through an ESG lens

By simplifying the investment process for international investors and ensuring them the same protections they take for granted in developed markets, CDBability materially enhances a market’s attraction – as has been proved time and time again.

  • Consider these examples or market reform:
    Peru - When the country launched its first CDBable bond last year, the issue was oversubscribed with strong international demand. This prompted J.P. Morgan to lift Peru’s weighting in its emerging markets bond index by 41 basis points.
  • Mexico - Here CDBability has transformed the local corporate bond market – reducing Mexican companies’ reliance on dollar borrowing. In Panama, non-resident interest in the country’s government bonds has similarly leapt in the wake of CDBability.

As a key conduit in the investment ecosystem, CDB helps countries make changes that have the power to transform investors’ perception of their markets – and make a sustainable difference to their funding.

For investors, we simplify the process of investing in emerging and frontier markets by removing structural barriers.

In both instances we are helping to generate opportunity and drive out risk.