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Sustainability Matters

Solid Emerging-Markets Funds With High Sustainability Ratings

Though most focus on larger companies in developing markets, these Morningstar Medalists span the value-growth spectrum.

Emerging-markets investing can benefit from the consideration of environmental, social, and governance, or ESG, factors. According to Sustainalytics’ research, emerging-markets firms generally lag behind developed-markets companies in their implementation of policies, governance structures, and systems to manage their ESG risks. On corporate governance, in particular, emerging-markets companies generally have weaker protection of minority shareholder rights, higher levels of corruption, and fewer policies in place to combat corruption, and they are more frequently involved in the most severe ESG controversies that can impact a company’s reputation and bottom line.(1) Being able to identify firms that are leaders in terms of how effectively they are addressing the ESG risks and opportunities they face in their businesses could be a significant competitive advantage for an emerging-markets portfolio.

Fund investors wanting to incorporate sustainability into the selection or monitoring of emerging-markets funds can use the Morningstar Sustainability Rating to help identify funds that hold companies that are managing their ESG-related risks and opportunities better than their peers. In fact, the rating can be especially helpful in this category because few emerging-markets funds have any kind of sustainable or responsible mandate in their prospectus.