Sustainable investing and the integration of ESG metrics into the investment process continues to grow in influence. Deloitte has estimated that ESG-related assets could make up about half of all managed assets in the United States by 2025. That’s about $34.5 trillion in ESG assets by 2025.
Most of that ESG investing is in developed markets. ESG investments in emerging markets are growing, but from a low base. In 2021, sustainable debt issuance in emerging markets more than doubled from 2020, bringing in $190 billion in funding. Sustainability-related equity issuance was a modest $25 billion.
Investors have historically been rewarded in terms of returns and diversification by adding emerging market assets to their portfolios. Over the past 25 years, annual correlations between emerging markets and developed markets have been as low as 0.14 and as high as 0.97. A value of 1.0 means that markets moved in total lockstep, with a value of 0 meaning that there is no correlation at all. This lack of correlation means that in some periods, such as the last 20-plus years, emerging markets have offered higher returns than developed markets.
It therefore stands to reason that many sustainable investing opportunities in emerging markets are waiting for those willing to do the work to uncover them.
To learn more, I spoke with Asha Mehta, managing partner and chief investment officer of Global Delta Capital, which focuses on investing at the intersection of emerging markets, quantitative analysis and sustainability. Mehta has spent a career investing in emerging markets. She has been an investment banker at Goldman Sachs, a portfolio manager at Acadian Asset management, and traveled to over to 80 countries, living in six, to better understand emerging markets. Mehta is also author of the book "The Power of Capital: An Adventure Capitalist’s Journey to a Sustainable Future."
During our conversation, Mehta talked about the risks and opportunities investors can expect and where she sees these markets heading in the future. This interview was lightly edited for clarity.
Matt Orsagh: How did you gravitate towards sustainable investing?
Asha Mehta: My career began in college as a pre-medical student, studying anthropology and biology. I ventured to rural India on a vaccine distribution project. When I arrived, my funding fell through. I gazed at the surroundings around me, in tattered clothes, unbrushed hair and holed shoes, and realized that what the underserved need more than health is wealth.
So began my career in investments. I saw investing as an efficient method to distribute wealth; investments build infrastructure, bring liquidity and literally create economic value. With a career in emerging and frontier markets, I viscerally understood the "power" of this capital.
I learned to allocate this capital to the furthest corners of the world by using systematic methods; technology and the world of big data provide us tools to cover every security in every country. However, traditional datasets only covered the hard, objective, financial data of a company. With my MBA background, I understood that financial data alone doesn’t provide the most holistic perspective.
In 2008, the "ESG movement" was formed, and I interpreted related datasets as the missing piece in understanding the non-financial component of business strategy. These datasets provided valuable insights on company’s relationships with suppliers, customers and employees.
That insight marked my prior firm’s signing of the Principles for Responsible Investing (PRI), and we became the first systematic manager to sign the PRI.
Orsagh: Your approach is largely quantitative in nature. When discussing sustainable investing, a lot of people think about fundamental analysis and screening. How does a quant do sustainable investing?
Mehta: Fundamental analysis and systematic tools bring complementary perspectives in sustainable investing. In many ways, systematic tools can be utilized to resolve some of ESG’s greatest challenges.
- Financial materiality: Statistics can be used to back test ESG signals and determine their financial materiality.
- Integration: Systematic tools enable a ESG signal to be integrated in the forecasting framework, such that every stock is evaluated on that measure.
- Returns-orientation: In portfolio construction, systematic managers may readily implement positive or negative screens to ensure mandate alignment; given the breadth of a quantitative manager’s coverage, these screens can often be implemented with little to no adverse performance impact and with consistent factor tilts.
Orsagh: In your book, you talk about traveling the world searching for investment ideas, mostly in emerging markets. Broadly what is the state of investing with a sustainability tilt in emerging markets?
Mehta: In emerging markets, sustainability issues present outsized vulnerabilities and outsized opportunities.
On the risk side, emerging markets are more susceptible to the dangers of physical risks, and they suffer more from limited access to energy, clean water and sanitation. Across countries in this asset class, economic disparities are often stark, and issues such as food insecurity and access to education are more profound. Governance risks are equally palpable, as standards of governance are weaker. Country risk, including geopolitical and sociopolitical risks, remains the greatest source of risk within the asset class.
However, mother is the necessity of innovation. Some of the most exciting innovations to bring critical resources — energy, finance, education — to remote regions are coming from this asset class. From a systematic perspective, we observe the ESG factor in investing has twice the payoff in emerging markets as it does in developed markets.
Orsagh: What are some of the biggest challenges and opportunities when looking for sustainable investment targets in emerging markets?
Mehta: From a systematic investing perspective, the greatest challenge is data availability. These countries are leapfrogging ahead, however, with respect to improving disclosure standards at the regulatory and stock exchange levels. In addition, many emerging tools, including natural language processing and machine learning, offer a complementary lens to improve our understanding of companies.
The opportunities that excite me most within this asset class are those related to the [United Nations] Sustainable Development Goals. My firm believes that the SDGs present a "strategic plan for the earth." We believe capital investments in emerging market economies over the next business cycle will be aligned with the SDGs. The rationale is that government funding, in terms of both external sourcing as well as capital expenditures, is often tied to the SDGs.
Orsagh: Can you give us some examples of some markets where you are seeing exciting things happening that people should know about?
Mehta: Here are some investment ideas that I find exciting. Investments in companies like these generate both alpha and impact.
- A Moroccan real estate company that specializes in building affordable housing in Northern Africa. With specialized designs, government support and attractive price points, this company supports the pathway out of poverty and into a growing middle class.
- A Brazilian energy company that produces renewable energy such as ethanol, bioelectricity, biogas and solar energy, which drives cleaner and more accessible energy infrastructure.
- A Bulgarian bank that extends mobile money into the "unbanked" corners of the country to expedite payments, extend credit and build savings. These banking resources bring informal workers into the formal economy and enable them to build more stable household economies.
Orsagh: What are some things you want from policymakers, companies concerning data, transparency around sustainability? Is this answer different for different markets? Will things like International Sustainability Standards Board (ISSB) standards help?
Mehta: Investors are not only hungry for access to additional information to inform our decisions, we are also aware of the financial materiality of this information. With the rise of big data, reporting standards have the ability to broaden, and investors’ needs are evolving accordingly.
Over the last two decades, we have witnessed the transformative effects of collaborative stewardship. From the impact of the PRI to the momentum of the SDGs, these collective programs have driven a new generation of asset management. Each investor who commits his/her voice, energy and capital to a collaborative engagement is a force multiplier. The ISSB standards are one example of this aligned approach, which will be valuable in ensuring a standardized reporting framework.
In emerging markets in particular, the rise of [the International Financial Report Standards Foundation] brought about significant advances in the ability to invest across the asset class, bringing insights and hence liquidity; these reporting developments were essential to allowing the markets to come to the mainstream. ISSB has the potential to allow broader ESG integration across the asset class — driving both alpha for investors and impact through their investments.
Orsagh: Get your crystal ball out and look, five to 10 years into the future. Where do you see sustainability in emerging markets being at that time?
Mehta: Emerging markets represent the bulk of the globe’s footprint, population and contribution to global GDP. Despite this profile, the asset class trades at a discount to developed markets due to its liquidity profile and perceived sociopolitical risks.
Sustainable investing has the power to unlock returns, integrate these markets and promote people, planet and prosperity. Ultimately, until the asset class reflects developed market standards, there will be significant opportunity for impact.