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Oct 20, 2015

Emerging markets: improving ESG disclosure boosts returns

Emerging market companies with better ESG disclosure outperform by 4 percentage points, Cass study says

Companies with strong and improving ESG reporting in emerging markets have higher annual returns and are much less likely to suffer extreme volatility, according to research by responsible investment manager Alquity and Cass Business School.

An analysis of 4,400 companies for the period 2011-2015 shows companies that disclosed more ESG-related information and were improving their ESG reporting processes saw annual returns of 9.4 percent, compared with the benchmark return of 5.4 percent.

‘ESG is a force for good and an essential tool for investing in emerging markets,’ says Paul Robinson, CEO of Alquity. ‘The findings of this study clearly show companies in emerging markets with strong and improving ESG disclosure perform better and display lower volatility than companies without. I urge emerging market companies, regulators, governments and investors to embrace ESG more widely in order to drive the growth of and investment in companies that are both responsible and financially successful.’

Companies with better and improving ESG disclosure are also five times less likely to suffer extreme volatility, according to a press release announcing the results of the study. The release concludes that the study shows ESG analysis ‘is an effective tool in identifying winning stocks because companies with high and improving ESG disclosure provide better risk-adjusted returns, especially in emerging and frontier markets where political and regulatory environments are less mature.’

The study further shows that ESG disclosure has increased sharply in emerging markets over the last five years, particularly in areas that are trying to attract foreign investment. ESG disclosure in the energy sector among companies in emerging markets has grown by 25 percent since 2011 while disclosure among financial sector firms has increased by 10 percent.

‘Forward-looking ESG provides investors with an indication of high-quality businesses, especially when the disclosure is voluntary,’ says Robert Lampl, head of Latin American investments at Alquity, in the release. ‘High-profile disasters like BP’s Macondo crisis in the Gulf of Mexico, the workforce crisis and shootings at Lonmin’s South African mines and more recently the problems experienced by Volkswagen all point toward an increasing scrutiny of corporate behavior.’