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By Guillaume Mascotto - November 2019
Many investors want their portfolios to provide financial security and help address key global issues. We believe they can achieve positive social and environmental impacts without sacrificing investment returns or reducing environmental, social and governance (ESG)-related risk mitigation. These opportunities lie in emerging markets (EM) investments with a business alignment to the United Nations Sustainable Development Goals (U.N. SDGs).1
Relative to developed markets, emerging markets have a greater need for investments in infrastructure, technological innovation and educational improvements. Living standards in some EM nations are among the lowest in the world—socioeconomic, gender and income inequalities can be profound. The region is also more vulnerable to environmental and health-related issues, such as pandemics and rare diseases. All these conditions make investing with an SDG focus in emerging markets especially relevant.
With large and growing populations, some of which are experiencing great wealth and equality disparities, we believe EM companies have greater potential to benefit from growth generated by realizing the positive impact the SDGs intend to achieve. Attaining the SDGs could therefore serve as a fundamental driver of growth in corporate revenues and earnings. In turn, these could drive returns from equities and other assets.
By investing with the intention of helping advance the SDGs, investors can play a critical role in creating a more inclusive society. According to the Business & Sustainable Development Commission, more than half the value of the global goals’ business opportunities are in developing countries. Emerging markets represent the lion’s share of opportunities across the food and agriculture, cities, energy and materials, and health and well-being systems. A notable portion of these opportunities lie in China, India and other countries in Asia.
Advancing the SDGs in emerging markets also represents the potential to create millions of new jobs across these four systems. SDG investing could create $12 trillion or more in market opportunities and up to 380 million jobs by 2030, with nearly half of these new jobs in EM cities.2
Source: Business & Sustainable Development Commission. Better Business, Better World, January 2017.
Despite nearly $1.2 trillion in public flows from emerging markets and developing countries, public financing alone won’t be able to supply the $4.5 trillion of capital needed to extend prosperity across the EM region. Private investments pursuing the global goals could help bridge the $3.3 trillion shortfall.3
We believe our approach to impact investing in emerging markets offers a distinct proposition: to invest in quality growth companies that seek to help solve some of the world’s most pressing problems in countries which may need the most help. At the same time, providing investment solutions geared toward the SDGs is a natural extension of the impact our firm creates through its unique business model.
It’s our view that we can make an impact by investing in companies that fuel change by contributing to the SDGs and demonstrating solid ESG risk management practices, while also generating alpha through our distinct growth philosophy. This philosophy centers on the belief that improving business fundamentals lead to acceleration in earnings and revenues that have the potential to yield stock price performance alongside positive societal and environmental value.
Consider an example of a company where we identified opportunities to achieve investment return potential along with measurable SDG impact. By providing access to better education to a wide range of individuals, this company’s operations can help alleviate some of the wealth and quality-of-living inequalities in emerging markets.
China Education Group (CEG) is the leading operator of private higher education and vocational schools in China. By providing the quality education, vocation training and job placement services that may lead to better employment opportunities, CEG helps reduce poverty and improve working conditions and economic growth potential. The company helps reduce income inequalities and empower women by elevating their social status and broadening access to job prospects.
Provide quality educational services, as defined by independent rankings, and boost employment placement rates among the general population.
Source: Bloomberg, 2019.
Head of ESG and Investment Stewardship
"Public financing alone won't be able to supply the $4.5 trillion of capital needed to extend prosperity across the EM region."
By investing with the intention of helping to advance the Sustainable Development Goals, you can play a critical role in creating a more inclusive society.
Can my investments do well while the companies I invest in do good? This is a question many investors ask as they consider portfolios that assess ESG factors as part of the investment process.
Guillaume Mascotto, head of ESG and Investment Stewardship, discusses how integration of ESG disclosures and company fundamentals is an essential component in the evaluation process.
Discussion of ESG's 2018 milestones and what is driving ESG investing.
1 Developed by a global team of industry and government leaders and adopted by all 193 member states, the SDGs include 17 goals and 169 attendant targets aimed at solving some of the world's most pressing problems by 2030. The goals include eradicating poverty, providing environmental resources, and achieving gender and income equality.
2 Business & Sustainable Development Commission. Better Business, Better World, January 2017.
3 Ibid, January 2017.
A strategy or emphasis on environmental, social and governance factors ("ESG") may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus. A portfolio's ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.