ESG and Emerging Markets: The Problem With Company Scoring
- Media Manager
- Jan 9, 2023
- 1 min read
Nasdaq - VettaFi
Written By: EFT Trends
Published: January 9th, 2023
Over the last half a dozen years investing into mutual funds and ETFs in the US that screen companies based on various ESG/sustainability criteria has soared. Over $350 billion dollars just in ETFs according to Bloomberg. Investors concerned about carbon emissions and sustainability often take a close look at Emerging Countries which is where 88% of the growth in emissions and pollution has been generated over the last 30 years according to data from the European Commission.
However, there is one big problem with ESG investing in Emerging Market companies. The problem is that many or most funds use 3rd party ESG company scoring to screen companies. And that scoring may not really be what investors think it is.
By way of comparison, consider if a passive or active fund manager was investing in fixed income in Emerging Markets. There are thousands of companies issuing debt. There are a number of credit rating agencies that rate those bonds. The two most prominent are Standard & Poor and Moody’s. They have been rating bonds overseas for decades and they both have clear, well-developed methodologies. In addition, they primarily rely on standardized financial data. As a result, a bond with a good (or bad) credit rating from S&P almost certainly would receive a similar good (or bad) rating from Moody’s.
