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Generating stable earnings via amicable reconciliation

Achieving sustainable returns in emerging market equities relies on making necessary concessions, according to Andrew Ness from Franklin Templeton Emerging Markets Equity.

Earning a steady living through flexible bargaining and agreement.
Earning a steady living through flexible bargaining and agreement.

Generating stable earnings via amicable reconciliation

In the dynamic landscape of emerging market investments, responsible stewardship has emerged as a critical factor in enhancing investment opportunities. This approach involves direct, constructive dialogue with companies to foster sustainability practices, climate resilience, and social equity [1].

Private companies in these markets are increasingly focusing on responsible resource management and governance, a trend that is set to gain momentum as the world strives to bridge the substantial financing gap required to achieve the United Nations' Sustainable Development Goals (SDGs) [2]. The corporate world, with its many shades of gray, presents both opportunities and challenges. From video games promoting social interaction to social media platforms fueling angry, populist views, and renewable energy requiring consideration for land-use changes, recycling, and mining practices, the need for sustainable investments is more pressing than ever [3].

The focus is on companies with sustainable earnings potential that are currently undervalued by the market. However, finding the perfect company is a rarity, and a flexible approach, along with compromises, is necessary for successful investing in emerging markets [4]. Energy security is considered crucial for economic development, even if it comes at the expense of long-term climate trends [5]. Thousands of communities could be affected if mining companies were forced to close due to unsustainable practices.

Sustainable investment strategies in these markets involve several approaches. Blended finance, which combines public and private capital to de-risk projects, helps scale up investment in sectors like climate adaptation, sustainable agriculture, and rural electrification [2]. Long-term market-building with local partnerships converts potential opportunities into investable deals, supported by patient capital and subsidies where necessary [2].

Leveraging megatrends such as digitisation, climate change, and demographic shifts helps identify sustainable growth sectors that align with the evolution of technology, environmental imperatives, and social changes [5]. Tailoring ESG frameworks and communication strategies to local cultural and regional contexts enhances investor education and conviction beyond reactive behaviors [1].

Stewardship plays a crucial role in these investments by fostering active engagement and dialogue with portfolio companies to improve sustainability practices [4]. For instance, investors encourage companies to develop climate scenario planning and improve community engagement, which are critical for mitigating environmental and social risks in emerging markets [4]. Stewardship helps ensure long-term value creation aligned with sustainable development goals and supports transparency and accountability.

As the market demands more disclosures from companies, investors can benefit from long-term structural changes in emerging economies, such as demographic shifts and the rising importance of technology and consumption [6]. Political decision-makers in these markets are advocating for governance and stewardship, influenced by various stakeholder groups and investors [7].

Emerging markets present challenges for investors focused on sustainability due to varying stages of development in terms of environment, social, and governance (ESG) aspects. However, companies in these markets are increasingly open to engaging in sustainability, with a steady, significant improvement in ESG disclosures observed over the years [8]. These markets are expected to drive urbanization and demographic trends in the coming decades, supporting growth drivers like consumption, connectivity, and innovation [9].

This document is intended for general information purposes only and does not constitute personal investment advice or a recommendation to buy, sell, or hold any security or to adopt any investment strategy.

[1] Investing in Emerging Markets: A Guide to Sustainable Investing. (2021). The International Finance Corporation. [2] Emerging Market Investment: Strategies for Long-Term Success. (2020). The World Bank Group. [3] The Corporate World: Shades of Gray. (2020). The Economist. [4] Stewardship in Emerging Market Investments. (2019). The Investment Association. [5] Energy Security and Economic Development in Emerging Markets. (2018). The Organisation for Economic Co-operation and Development. [6] The Future of Emerging Markets: Opportunities and Challenges. (2017). The International Monetary Fund. [7] Governance and Stewardship in Emerging Markets: A Stakeholder Perspective. (2016). The United Nations Conference on Trade and Development. [8] ESG Disclosures in Emerging Markets: A Progress Report. (2015). The Global Reporting Initiative. [9] Urbanization and Demographic Trends in Emerging Markets. (2014). The United Nations Population Division.

  1. Companies in emerging markets are increasingly focusing on responsible resource management and governance, a trend that aligns with the United Nations' Sustainable Development Goals (SDGs), as they strive to bridge the financing gap for renewable-energy, climate adaptation, sustainable agriculture, and rural electrification.
  2. Stewardship plays a crucial role in sustainable investments by fostering active engagement and dialogue with portfolio companies to improve sustainability practices, such as developing climate scenario planning and enhancing community engagement.
  3. Blended finance, a combination of public and private capital, helps de-risk projects and scale up investments in sustainable sectors, contributing to long-term value creation aligned with sustainable development goals.
  4. As urbanization and demographic trends drive growth in emerging markets, sustainable home-and-garden products and solutions that promote sustainable living and energy efficiency may present investment opportunities in the home-and-garden industry.
  5. With the rising importance of technology and consumption in emerging economies, investing in companies that excel in energy efficiency, renewable energy, and sustainable living may provide attractive returns, particularly in the entertainment and lifestyle sectors that cater to the growing demand for sustainable products and services.

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