As sustainable investment moves into the mainstream in the developed world, emerging-market companies and governments are also turning their attention to environmental, social and governance (ESG) factors. Although much of their focus has initially centered on corporate-governance enhancements – such as company ownership mechanisms and mentalities, board structures, relationships with related parties and uses of capital – focus is increasingly turning to environmental issues as well.

Emerging markets have been perceived as the poster children of pollution and fossil-fuel heavy energy industries. All too often in the past, countries such as India were associated with lax environmental protection – illustrated by episodes such as the 1984 Bhopal chemical disaster. This, matched with historically relatively weak regulation and high corruption levels in many countries, presented some serious obstacles to ESG-aware investors interested in exploring emerging-market potential.

Yet times are changing. Large emerging markets like China, which has seen phenomenal economic growth, now recognize this has come at a serious environmental cost. China is seeking to redress this by declaring ‘war’ on pollution. Its ‘Beautiful China’ initiative seeks to create good working and living environments for its people while helping to underpin global ecological security.

While policies such as these aim to promote sustainable, high-quality economic growth, they also serve a symbiotic function, as they can help improve governance, transparency and working practices. In turn, this can help attract a higher number of overseas investors.

China Pollution

Four decades of rapid industrial growth transformed China into the world’s biggest carbon emitter. In 2015, Chinese air pollution was so extreme that independent research group Berkeley Earth believes it was contributing to around 1.6 million deaths a year.1

In January 2017, the country’s air-pollution levels again reached dangerous highs – as high as 24 times the safe levels designated by the World Health Organization in some regions.2 The government responded by announcing that environmental pollution control was a top-three priority (along with reducing poverty and managing financial risk).

According to the World Economic Forum, China needs an estimated US$6.4 trillion to US$19.4 trillion to finance its transition to a greener economy.3 However, it is already making huge strides. In the four years from 2014, it has managed to cut potentially deadly fine air particulates by an average of 32%.4 Such change is likely to come incrementally rather than through a ‘big bang’, but China is making moves in the right direction by shutting down coal-fired power stations, and taking out jobs from old, dirty industrial sectors and looking to service sectors for growth.

In aggregate, China is also now reportedly the world’s largest producer, exporter and installer of solar panels, wind turbines, batteries and electric vehicles, placing it at the forefront of the global energy transition.5 China is also taking action on other fronts. Until recently, it was one of the world’s biggest recyclers of foreign plastic and other refuse and waste. Between 1992 and 2018, China had imported 106 million metric tons of refuse, including plastic bags, bottles, wrappers and other containers.6 Recently, it announced it no longer wanted to be the “world’s largest garbage dump”, and banned the import of millions of metric tons of plastic, textiles and paper waste from other countries. While this has posed new problems for waste exporters in more developed markets, it underlines Beijing’s commitment to, literally, clean up its act.

India is another giant emerging market battling to address key environmental and governance concerns. Once almost exclusively dependent on thermal coal power generation, the country realized the disastrous impacts this could have on efforts to reduce and reverse climate change. Fortunately, this realization came just as the cost of renewable energies such as solar power fell dramatically. India has since scaled back its plans for new coal-fired power stations and stepped up its focus on solar energy. Last year, it announced its intention to launch a tender for 100 gigawatts of solar power, ten times the size of the existing largest solar tender in the world.7

Making Progress

While emerging markets continue to make further strides on the environmental front, it is important to remember that individual emerging markets remain highly diverse, not least because of their specific existing natural resource mix, manufacturing skills and trade channels. Important, but often less publicized, progress is being made to improve social aspects (such as labor laws and digital rights) and governance standards, which can be crucial for investments.

In South Korea, the Korea Corporate Governance Service has established the Korea Stewardship Code and encouraged wider moves to improve transparency. In China, the introduction of the China Data Protection Regulations (CDPR), designed to govern cyberspace security and data protection, is a positive sign the government is working to boost levels of transparency and professionalism in an increasingly online business world.

While emerging markets are far from homogenous, and standards vary widely, governance is showing definite signs of improvement across many individual companies and markets. More and more companies are producing corporate social responsibility reports, and holding themselves to higher standards of account.

It is worth noting that, while emerging markets are often challenged on their accountability, high-level corporate scandals are far from rare in developed markets such as the US and Europe. There are also a growing number of emerging-market companies which are trying hard to improve their business and ethical practices in order to make themselves more attractive to global investors.

However, progress on ESG issues depends very much on the approach taken by individual markets and specific companies. For example, state-run enterprises or businesses transacting a lot with the government in markets such as Russia and China are struggling to improve their governance, with lower standards of behavior and inefficiency still rife in many of these organizations. In our view, it is therefore critical that investors in these markets are diligent in their research in order that they can sort the wheat from the chaff. This comes down to looking at the structure and culture of companies, and, with such a wide spectrum of quality on offer, there is no substitute for undertaking deep due diligence.


1 Bloomberg. China’s war on pollution will change the world. March 9, 2018.
2 Guardian. China smog: millions start new year shrouded by health alerts and travel chaos. January 2, 2017.
3 WEF. Here’s how China is going green. April 26, 2018.
4 New York Times. Four Years After Declaring War on Pollution, China Is Winning. March 12, 2018.
5 IRENA. A new world – the geopolitics of the energy transformation 2019.
6 Bloomberg. China Just Handed the World a 111-Million-Ton Trash Problem. June 20, 2018
7 The Guardian. India’s huge solar ambitions could push coal further into shade. June 30, 2018.
8 WEF. China is leading a surge in electric vehicle sales. May 22, 2018.
9 BloombergNEF Electric Vehicle Outlook 2019.

Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.

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