For investors looking to get dual exposure to international diversification via emerging markets (EM) and environmental, social, and governance (ESG) principles, here's a fund for you: the Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF (EMSG). Academic research detailed in a Triple Pundit article shows the two can mutually reinforce one another.
EMSG seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Emerging Markets ESG Leaders Index (the “underlying index”). The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the underlying index.
The underlying index is a capitalization weighted index that provides exposure to companies with high environmental, social and governance (“ESG”) performance relative to their sector peers. Per Morningstar numbers, the fund has generated a 15% return thus far this year:
EM and ESG Get Academic Backing
As the aforementioned Triple Pundit article notes, investing in EM with an ESG component "leads to 'better performance' when adjusted for country and sector factors, according to analysis from Dutch-headquartered asset manager NN Investment Partners (NN IP). And companies with a high ESG rating were found to have delivered 'higher Sharpe ratio.'"
The Sharpe ratio represents returns while taking risk into account. The added that research by NN Investment Partners "titled ‘The Materiality of ESG factors for emerging markets equity investment decisions: academic evidence’, and conducted in association with the European Centre for Corporate Engagement (ECCE) at Maastricht University’s School of Business and Economics...claims to be the 'first comprehensive investigation' into the performance of EM equity portfolios using ESG criteria."
"The findings, which tracked data between early 2010 and late 2015, were based on 650 companies in the EM universe in June 2012 and expanded to 751 companies by June 2015, found that gains from investing in companies with higher ESG ratings are stronger in EMs than in developed markets (DMs), while ownership structures of companies were the “most important corporate governance driver," the article continued.
The research also underscored the importance of having a high ESG rating, which leads to stronger performance overall. The report data showed that "EM companies with a high ESG rating outperform those with a low rating on a risk-adjusted basis, and 'excluding companies with controversial ESG behaviour' adds to overall performance."
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