This document analyzes whether ESG factors enhance returns in emerging and frontier markets. There are three key findings: 1. Emerging market companies have lower ESG disclosure than developed market companies, but emerging markets saw greater improvement from 2011-2015. Various factors are driving increased disclosure in emerging markets. 2. Companies with high and improving ESG disclosure had higher equity returns and lower volatility than companies with low or decreasing disclosure. 3. An investment strategy focusing on companies with strong ESG disclosure coupled with fundamental analysis outperformed broad indexes with lower volatility, generating higher risk-adjusted returns. Historical market data provides evidence that an ESG-driven strategy enhances portfolio performance in emerging and frontier markets.

1. DOES ESG ENHANCE
RETURNS IN
EMERGING &
FRONTIER MARKETS?
A White Paper produced by Roberto Lampl, Head of Latin American
Investments at Alquity Investment Management and
Niccolò Bardoscia & John Munge, MSc students
at Cass Business School

2. “ESG can, and should
be, a priority for both
corporates and investors”
Paul Robinson - CEO & Founder, Alquity

3. PAGE 3
TABLE
OF CONTENTS
FOREWORD 4
EXECUTIVE SUMMARY 5
RESEARCH OVERVIEW 6
KEY FINDINGS & IMPLICATIONS 8
1. ESG DISCLOSURE IN EMERGING MARKETS VERSUS
DEVELOPED MARKETS 8
2. ESG DISCLOSURE RELATIONSHIP WITH RISK
AND RETURN 11
3. ESTIMATING THE VALUE-ADD OF AN ESG-DRIVEN
INVESTMENT STRATEGY 14
CONCLUDING REMARKS 18

4. PAGE 4
I founded Alquity in 2010 to build a more
responsible model of investment management,
investing only in well-run, responsible businesses
that achieve success sustainably: by looking
after their people, their communities and the
environment.
We measure the success of our investments on
the financial returns they offer, and also on the
wealth and opportunities they deliver locally.
Creating vibrant economies in the places we
invest makes business sense. For this reason, we
believe fund managers can complete a virtuous
circle by using part of their profits to invest in
those at risk of being left behind. Alquity invests
up to 25% of its management fees (with no
negative impact on investors returns) to support
small entrepreneurs get their business ideas off
the ground.
Across all of our investments we apply ESG
standards coupled with fundamental analysis
because it is our experience that companies with
ESG disclosure outperform those that have no,
or low ESG disclosure. This is particularly the
case in emerging and frontier markets where
governance structures are less developed, and
the risks are greater.
The performance of Alquity’s funds evidence
this link. Our Africa Fund, for example, has
consistently ranked amongst the best performing
Africa funds over the last 5 years and beaten the
benchmark in each year.
We also wanted to look beyond our own
portfolio at a broader market analysis of the
ESG link to performance, and to compare ESG
disclosure in emerging markets with developed
economies. We are grateful to the assistance of
Cass Business School, and two of their Masters
students who analysed over 4400 emerging and
developed market companies over the period
2011-2015 to ensure a robust sample.
In summary, the findings clearly show that
companies with strong and improving ESG
disclosure perform better, and display lower
volatility, than companies with no, low or
decreasing ESG disclosure.
I think there are 2 important conclusions from
this finding.
Firstly, investment managers can improve
their portfolio performance and risk adjusted
returns by integrating ESG factors into their
investment process in emerging and frontier
markets. Secondly, the mere act of disclosing
ESG policies tends to improve a company’s stock
performance and its attractiveness to a foreign
investor. So my message is that ESG can, and
should be, a priority for both corporates and
investors.
I urge governments, regulators and international
investors to encourage companies to embrace
ESG disclosure to drive the growth of and
investment in responsible, successful businesses.
ESG is a force for good because it enhances
performance.
This is more important than ever, as we navigate
volatile and risky emerging markets, in search of
the successful companies of the future. And it is
important for attracting international institutional
capital to emerging economies to drive wealth
creation and opportunities.
FOREW0RD
PAUL ROBINSON
FOUNDER & CEO, ALQUITY

5. PAGE 5
There are three key findings from this
analysis:
1. Emerging market companies have
lower levels of ESG disclosure
compared to companies in
developed markets, however,
we can see a greater rate of
improvement in the level of
disclosure in EM vs DM during the
past 5 years.
2. There is a greater amount of
dispersion regarding the amount
of ESG disclosure within the EM
universe. Companies with high
and improving disclosure deliver
higher equity returns vs their
peers
3. A strategy focusing on ESG
coupled with fundamental
analysis outperforms the broad
indexes with lower volatility
characteristics, i.e. it generates
higher risk adjusted returns.
With a zero interest rate environment and equity
valuations stretched across most developed
markets, investor interest is focused more
than ever on the emerging and frontier space.
However, chasing returns in these markets can
be risky. The high volatility in the Chinese stock
market in recent weeks, and years, is a reminder
of the precipitous movements in emerging
markets and why investors need to identify and
invest in winning stocks, rather than an index of
the market.
In this paper, we show how a forward looking
strategy based on simple and objective
Environmental, Social and Governance (ESG)
transparency coupled with fundamental equity
analysis significantly enhances portfolio returns
while reducing its risk profile. In particular,
we find that emerging and frontier market
companies with a strong disclosure on these
factors are five times less likely to suffer from
extreme volatility and generate a 3.5% annualized
alpha when included in a well-diversified
portfolio. These results are not surprising as
emerging and frontier markets have less mature
institutional oversight of businesses. Increased
transparency is therefore a risk mitigating
factor and gives investors an indication of high
quality businesses, especially if the disclosure is
voluntary.
We also find that investing in companies with
high and improving ESG disclosure provides the
better risk-adjusted returns. The results are more
pronounced in emerging and frontier markets
than in developed markets as a result of stronger
market efficiency in the latter. We believe that
given the information asymmetry in EM and FM,
ESG analysis is a strong tool in identifying value
added stocks i.e. “winners” in these markets.
The paper is split into three parts. The first part
compares the trends in disclosure in emerging
markets compared to developed markets.
The second part, investigates the relationship
between ESG disclosure and risk-adjusted
returns. Finally, we test our hypothesis using
historical market data and show compelling
evidence for the performance enhancement of
an ESG-driven investment process.
EXECUTIVE SUMMARY
ROBERTO LAMPL
HEAD OF LATAM INVESTMENTS, ALQUITY

6. PAGE 6
OBJECTIVES
We set three questions to examine in this paper:
1. How does ESG Disclosure compare in
Emerging Markets versus Developed
Markets?
2. Does the level of ESG Disclosure, as a proxy
for a company’s adherence to ESG factors,
act as a suitable indicator for forward
medium-term risk-adjusted performance in
emerging and frontier markets?
3. Can we find evidence from historical market
data to support the question above?
HOW WE WENT ABOUT OUR
ANALYSIS
Information on the ESG policies of global
companies is becoming more readily available
as ESG considerations are becoming more
mainstream. However, the way ESG data is
measured, valued and weighted does vary
and there are several data providers including
Bloomberg, MSCI and Sustainalytics.
We used ESG disclosure data compiled by
Bloomberg for all our analysis. Bloomberg’s
rating system on ESG disclosure takes into
consideration a company’s transparency and
willingness to disclose on their sustainable
actions. With this rating system, a score of 100
represents full disclosure; a score of 0 means
no disclosure. A higher score represents more
robust data equating to a more accountable
and transparent company. Our analysis assumes
that the level of disclosure on ESG factors
is an indicator of a company’s compliance
and acknowledgement of its importance as
an embedded part of its business processes,
and is an appropriate and intuitive proxy for a
company’s adherence to these factors.
We selected a sample of 1300 emerging
market companies and 3100 developed market
companies from those countries that represent
the bulk of the MSCI Emerging Markets and MSCI
World Indices respectively, based on market
capitalisation. The analysis covers the period
2011 – 2015 inclusive, for which quality data is
available.
RESEARCH
OVERVIEW

8. PAGE 8
1. ESG DISCLOSURE IN EMERGING MARKETS VERSUS
DEVELOPED MARKETS
The graphs below (Figure 1) show the
improvement in disclosure amongst EM
companies between 2011 and 2015. There is a
clear increase in the number of companies with
a disclosure score of 40 or more comparing the
data of 2011 with the output of 2015
In Developed Markets we see that the
distribution of disclosure remains more or less
the same, though the quantity of companies
disclosing increases, most probably impulse
by disclosure requirements following the 2008
global financial crisis.
Companies in developed markets exhibit higher
levels of disclosure than those in Emerging
Markets. Developed markets companies also
have lower dispersion on their level of ESG
disclosure (Figure 2).
However, companies in emerging markets have
seen better improvement in the level of ESG
disclosure with a larger proportion of companies
disclosing significantly higher above their peers
(Figure 3).
Emerging markets show a greater number of
sectors with improving levels of ESG Disclosure
(Figure 4). Energy and Financials show the
greatest improvement in emerging markets
(25% and 10% respectively) and Financials
also leads developed market improvements
(2%). We believe this is a reaction to higher
KEY FINDINGS
& IMPLICATIONS
Distribution of Emerging Market Companies
Based on ESG Scoring
Distribution of Developed Market Companies
Based on ESG Scoring
2011 2015
Y Axis = Bloomberg ESG Score
X Axis = Number of Companies
Figure 1
Y Axis = Bloomberg ESG Score
Dispersion of ESG Scorings
Figure 2
0
50
100
150
200
250
300
350
0 10 20 30 40 50 60 70 80 90 100
0
50
100
150
200
250
300
350
400
450
500
0 10 20 30 40 50 60 70 80 90 100

9. PAGE 9
levels of scrutiny from investors, regulators and
commentators following the global financial
crisis in 2008.
Similarly, we believe marked improvements in
Energy ESG disclosure in emerging markets
is in response to high profile global crisis and
accidents like BP’s Macondo disaster in the
Gulf of Mexico and the strikes and shootings
at Lonmin’s South African mines. The need to
better understand and mitigate against such
risks is driving greater transparency.
The healthcare sector records an improvement
in Emerging economies but significantly declines
in Developed economies. This reflects the fact
that healthcare facilities in emerging markets
are still at their nascent stages and more likely
to improve their levels of disclosure as more
investors come on board to support their
growth. This is certainly the case in India where
the health care sector has attracted a significant
amount of foreign investor interest.
FACTORS DRIVING ESG DISCLOSURE
IN EMERGING MARKETS
The research indicates increasing levels of
disclosure across Emerging Markets over the
past 5 years. Over the last decade the leading
emerging markets have become more integrated
into the global economy. This integration has
included increased levels of investment in
companies from these countries.
There are a number of factors driving increased
disclosure of ESG information from emerging
market companies, as investors seek to put
money into these rapidly expanding economies.
The factors reflect pressures from a wide range
of stakeholders including NGOs, campaign
groups, trade unions, community representatives
and, crucially, by some emerging market
governments, to ensure that the negative social
and environmental impacts of corporate activity
are mitigated in some way.
• Government and regulators are the
main drivers of disclosure in the region
by promoting sustainability through
regulatory reforms. For example, in China,
the State-owned Assets Supervision and
Administration Commission (SASAC)
required all government-owned companies
to release CSR reports in 2012. As a result,
we’ve seen more Chinese companies
Median Disclosure Score Increase
Figure 4
Emerging Markets Developed Markets
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
Energy
Financials
Industrials
Health Care
Information Technology
Consumer Staples
Materials
Telecoms
Consumer Discretionary
Utilities
Emerging Markets
Developed Markets
Above Average Disclosure
Limited DisclosureAverage Disclosure
Figure 3

10. PAGE 10
STOCK PROFILE:
GRUPO HERDEZ
LOCATION: Mexico
SECTOR: Food & Beverage
MARKET CAP: US$1,1bn
PERFORMANCE (H1 2015): +10.0%
ALQUITY FUNDS: Latin America, Future World
In my opinion, Herdez’s growth
achievements and future growth strategy
are supported by their high adherence to
ESG standards.
Their high level of transparency and their
alignment of interests with all of their stakeholders enables
them to partner up with large branded food companies in
the US, and have easy access to the local and global capital
markets. Focusing on long-term relationships enables the
firm to maintain its wide and deep reach into small and
large retailers across its markets.
Their awareness that their people are a key asset to achieve
their goals is evident in their focus on developing in-house
technical skills and competencies through their Herdez
University.
Their commitment to the society’s well-
being is present in their social involvement
by supporting health awareness programs
and active support to the less fortunate.
Roberto Lampl
Head of Latin American Investments, Alquity
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disclose ESG information. The Hong Kong
following the global financial crisis in 2008.
• Pressure from institutional investors such
as developmental finance institutions
(DFIs), the primary source for many
of emerging markets PE funds, have
also helped drive improvements in ESG
practices. The ESG agenda is now so
important for some firms that dedicated
in-house coordinators or committees have
been appointed to oversee risk and other
related issues in these areas.
• The improvement in the level of disclosure
within the financial sector can be attributed
to the 2008 global financial crisis. The
crisis revealed the risks that investors can
be exposed to across all asset classes
and highlighted the need for greater
accountability, transparency, responsible
ownership and long-term investing.
We believe that the crisis convinced an
increasing number of mainstream investors
of the value of taking factors such as
climate change, environmental and social
disclosure and corporate governance into
account when making their investment
decisions and exercising their ownership
obligations. In turn, this has put pressure
on more companies to increase their level
of transparency.
• Following the October 2010 environmental
disaster in the Gulf of Mexico, ESG
analysis has become increasingly popular
in helping fund managers better limit
their portfolio’s exposure to stocks with
a high propensity of extremely negative
outcomes. Companies also realised that

11. PAGE 11
poor ESG practises exposes them to high
litigation costs and retaliation from activist
shareholders.
The data demonstrates that ESG reporting is
and will continue to become more mainstream.
This is encouraging, however, there is clearly
much work to be done. Many emerging
markets companies currently don’t understand
what ESG reporting is, or why they would
want to do it. Nevertheless, due to pressure
from government and investors, awareness is
improving and can be anticipated to be higher
in the coming five years.
2. ESG DISCLOSURE RELATIONSHIP WITH RISK
(VOLATILITY) AND RETURN
The table above (Figure 5) illustrates the
influence of a company’s level of disclosure and
its improvement in disclosure and the level of risk
adjusted returns it is able to generate.
In essence, companies that have high levels of
disclosure and show a high level of improvement
in their disclosure tend to exhibit the highest
level of risk adjusted returns.
Conversely, low disclosure companies with low
improvement show the lowest risk adjusted
returns. Clearly a greater degree of disclosure
improvement has a greater impact on risk
adjustment returns for both high and low
disclosure firms. The data for developed market
firms is less compelling and this is probably the
result of a higher starting point of disclosure and
its lower dispersion.
• It is worth noting that in emerging
markets, as well as Middle East and
Africa, companies with high levels of
ESG Disclosure that also exhibit an
improvement in levels of transparency,
outperform their counterparts.
• The relationship is less apparent in
developed economies due to the stronger
levels of market efficiency and higher
company awareness of ESG risks. The
results tell us that the added benefit of
ESG analysis is most acute in emerging
markets. Generally, emerging markets
companies have a longer way to go in
improving their awareness to ESG risks.
Therefore an investment strategy that
selects, from these markets, companies
that exhibit high levels of awareness and
adherence to ESG factors leads to better
performance
EMERGING MARKETS
(RISK ADJUSTED RETURNS)
ESG Disclosure Growth
Low High
ESG Disclosure Score High 2.0% 5.4%
Low 1.2% 3.1%
MIDDLE EAST & AFRICA MARKETS
(RISK ADJUSTED RETURNS)
ESG Disclosure Growth
Low High
ESG Disclosure Score High 2.8% 7.4%
Low 4.4% 5.9%
DEVELOPED MARKETS
(RISK ADJUSTED RETURNS)
ESG Disclosure Growth
Low High
ESG Disclosure Score High 3.3% 3.4%
Low 4.5% 3.0%
Figure 5

12. PAGE 12
VOLATILITY
• High ESG companies have just 18.4%
chance of experiencing 5-years total
returns below zero, the probability is 30.9%
for low ESG companies
• High ESG companies have just 24.7%
chance of suffering from high volatility
(>45%) and just 0.9% chance of suffering
from extreme volatility (>90%) over the
next five years. This compares with 39.54%
and 5.23% for low ESG companies
• Companies with business ethics policies
have just 14.53% chance of suffering from
high volatility, while companies with no
such policies have a 31.59% chance of
suffering from high volatility
STOCK PROFILE:
EDITA FOOD INDUSTRIES
LOCATION: Egypt
SECTOR: Food & Beverage
MARKET CAP: US$1,6bn
PERFORMANCE (H1 2015*): +79.7%
ALQUITY FUNDS: Africa, Future World
*Stpcl IPO 1 April 2015
Edita Food Industries produces and
sells snacks (predominantly cakes and
croissants) in a fast growing, under-
penetrated emerging market in Egypt.
Although only recently IPO’d, they have 20
years’ operating experience in the industry
and have excellent corporate governance.
They have very good Health & Safety Policies, with 28
specialists responsible for ensuring that all facilities maintain
a safe working environment and comply with relevant
environmental rules and regulations. They also comply with
all governmental regulations pertaining to environmental
emissions and properly treat any discharged water.
Moreover, they have a strong belief that charity begins at
home – encouraging and nurturing the
growth and well-being of staff. This has
resulted in a very low staff turnover of 1.2%.
David McIlroy
Head of African Investments, Alquity 2
2.5
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Chance of Returns & Volatility
Figure 6
1%
25%
18%
5%
40%
31%
0% 10% 20% 30% 40% 50%
Chance of Suffering from
Extreme Volatility
Chance of Suffering from
High Volatility
Chance of Suffering from
Negative Returns
High ESG DisclosureLow ESG Disclosure

14. PAGE 14
3. ESTIMATING THE VALUE-ADD OF AN ESG-DRIVEN
INVESTMENT STRATEGY
VOLATILITY
In order to study how ESG based strategies
would have performed in the past, we performed
several back-tests. For each year we selected
emerging markets and frontier stocks that
satisfied the following criteria:
1. Market cap > $2bn
2. Free float > 25%
3. At least 35% independent directors
4. Bloomberg ESG disclosure score in the top
50%
5. ROE above 10% for each of the past 5
years
We used ROE stability as a fundamental
indicator because it is one of the key criteria that
Fund Managers at Alquity use when selecting
stocks. And we used the ESG disclosure score
and the percentage of independent directors to
identify companies with strong ESG. We then
equally weighted the stocks and rebalanced
the portfolio every year, measuring the weekly
performance of the portfolio against the MSCI
emerging index.
Over the sample period June 2010 – June 2015,
our ESG portfolio realized a 56.9% return against
a 30% of the benchmark. This amounts to an
annualized performance of 9.4%, against the
5.4% realised by the benchmark.
As the chart below shows (Figure 7), a
significant part of the out-performance was
All Emerging MarketsAll Emerging Markets (ex China)
BenchmarkPortfolio
Figure 7
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0
20
40
60
80
100
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Performance(USD)
Portfolio Composition (all EM, ex China)
Figure 8
Materials
Energy
Information Technology
Consumer Staples
Telecommunication Services
Utilities
Industrials
Health Care
Consumer Discretionary
Financials
Materials
Energy
Information Technology
Consumer Staples
Telecommunication Services
Utilities
Industrials
Health Care
Consumer Discretionary
Financials

15. PAGE 15
generated between the end of 2014 and mid-
2015, when local A share Chinese stocks rallied.
In order to remove the bubble effect and correct
any possible country bias, we excluded local A
share Chinese stocks from our security universe
and we ran the back-test again.
The performance dropped slightly to 49%, but
as the chart below shows, the alpha generated
is more stable over time, resulting in a steadier,
more solid out-performance.
The back-test indicates that a simple ESG
disclosure based strategy, combined with a
fundamental filter (consistent and strong ROE),
generates significant out-performance. However,
out-performance is not always an indication
of true alpha, for example it is possible to
outperform the benchmark:
• Overweighting sectors that performed well
• Overweighting countries that performed
well
The chart opposite (Figure 8) shows the sector
composition of our portfolio. We can see
that the portfolio is well diversified and does
not overweight sectors such as Health Care,
Consumer Staples or Technology that performed
particularly well in the emerging markets during
the 2010-2015 time period.
In order to investigate whether the strategy
works across different countries, we ran separate
back-tests for 6 sample emerging markets: Brazil,
Hong Kong China Enterprises, India, Indonesia,
Mexico and South Africa. The table above
(Figure 9) provides the summary results.
The results show that out-performance is
generated consistently across countries as
the portfolio outperforms the benchmark in 5
out of 6 countries, indicating that alpha is not
generated by a country bias. Volatility is typically
higher for our ESG portfolios compared with
the benchmark, but if we look at the maximum
quarterly draw-down, it is significantly lower in 5
out of 6 simulations.
The betas of the portfolios are also very close
to 1, indicating that out-performance is not
explained by a greater exposure to systematic
risk. Moreover, we can exclude that out-
performance is due to a lower systematic risk
bias as the last three years have not been
positive for emerging markets equities.
AN ESG MOMENTUM BASED
STRATEGY
As we have demonstrated above, companies that
improve their ESG score perform better. In order
to back-test the hypothesis, we reran the back-
tests, replacing the ESG disclosure score with the
COUNTRY
5-YEAR
RETURNS
ANNUALISED
VOLATILITY
MAX QUARTERLY
DRAWDOWN
PORTFOLIO BENCHMARK PORTFOLIO BENCHMARK PORTFOLIO BENCHMARK
BRAZIL -29.67% -36.47% 25.20% 25.32% -6.10% -6.85%
HONG KONG
(CHINA)
38.00% 34.79% 29.51% 25.13% -5.28% -6.27%
INDIA 56.87% 28.37% 22.37% 22.55% -6.00% -5.83%
INDONESIA -16.53% -11.63% 21.57% 18.73% -9.22% -12.24%
MEXICO 42.93% 31.31% 35.07% 27.03% -11.20% -17.05%
SOUTH AFRICA 66.22% 47.13% 30.95% 29.31% -9.58% -11.46%
Figure 9

16. PAGE 16
ESG disclosure improvement over the previous
year. Every year we selected stocks that satisfied
the following criteria:
1. Market cap > $2B
2. At least 35% independent directors
3. Bloomberg ESG disclosure score 1-year
improvement in the top 50%
4. ROE above 10% for each of the past 5
years
Once again, we equally weighted the stocks and
rebalanced the portfolio every year, measuring
the weekly performance of the portfolio against
the MSCI Emerging Market Index (Figure 10)
Even here, we find a strong out-performance
that is not explained by country or sector biases.
Although the results on returns seem
inconclusive as the ESG momentum portfolio
outperforms in only 3 out of the 6 back-tests
performed, it is clear that companies that
increase their disclosure suffer from lower risk
measured by volatility or maximum quarterly
draw-down, with consistent results across
countries (Figure 11).
BenchmarkPortfolio
Figure 10
STOCK PROFILE:
GLENMARK PHARMACEUTICALS
LOCATION: India
SECTOR: Pharmaceuticals
MARKET CAP: US$4.5bn
PERFORMANCE (H1 2015): +31.2%
ALQUITY FUNDS: Asia, Indian Subcontinent
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Glenmark Pharmaceuticals
produces product for the Indian,
US and European markets, as well
as undertaking drug discovery
programmes internationally too.
They are the leading examples of ESG in the Indian
Pharmaceutical sector, with a huge focus on ethics,
which is highlighted at every management meeting.
Governance wise, they have adopted the most
conservative accounting policies seen in the
industry, and all their plants are quality-certified to
US standards – as well as having a big
focus on reducing waste discharges.
Mike Sell
Head of Asian Investments, Alquity

17. PAGE 17
5-YEAR
RETURNS
ANNUALISED
VOLATILITY
MAX QUARTERLY
DRAWDOWN
PORTFOLIO BENCHMARK PORTFOLIO BENCHMARK PORTFOLIO BENCHMARK
PORTFOLIO 46.48% 1.57% 17.80% 18.46% 8.96% 13.31%
BRAZIL -14.88% -20.81% 25.97% 25.73% -7.56% -6.85%
HONG KONG
(CHINA)
-6.95% 34.85% 23.59% 25.13% -3.30% -6.27%
INDIA 58.31% 21.23% 20.81% 20.44% -17.51% -17.90%
INDONESIA 3.28% 13.02% 22.51% 29.13% -12.19% -19.19%
MEXICO 38.57% 33.72% 24.86% 27.40% -10.92% -17.50%
SOUTH AFRICA 35.52% 47.12% 26.04% 29.30% -8.61% -11.42%
Figure 11

18. PAGE 18
Emerging markets are becoming more integrated
into the global economy and investors are
increasingly attracted by their strong economic
growth. However, the investment mind-set used
in developed markets cannot be applied to
emerging markets because risks are more acute
in emerging markets due to weaker regulatory
frameworks. Investors therefore need to apply
a new level of thinking when approaching
emerging market investment opportunities.
In this paper, ESG analysis has been shown as
one solution to tackling investments in emerging
markets. Better investment decisions are likely to
be made through the careful consideration of a
companies’ adherence to ESG standards.
This study has shown that emerging market
companies are increasing their level of
transparency on ESG under pressure from
regulatory supervision, institutional investors
and a range of stakeholders. This will increase
investor confidence in emerging markets.
Using Bloomberg data, the study has identified
that higher risk-adjusted returns are associated
with companies with high and improving ESG
disclosure scores. Clearly, investors will reward
companies that are more transparent on ESG
matters. The study has also quantified the added
benefit of having ESG analysis incorporated in
the investment process. ESG strategies were
found to outperform the benchmark as well as
similar strategies lacking the ESG criteria (control
experiment). The ESG strategies recorded higher
average returns and lower volatility over the
study period.
The study therefore concludes that ESG analysis
is essential for emerging market investors looking
to beat the market and minimise downside
risk. The paper is not without its limitations, for
example, companies’ own ratings on ESG issues
were not used due to the subjective nature of
available data. Instead, simple disclosure data
on a companies’ ESG activities was used as
a proxy. This was based on the assumption
that companies which act in an ethical and
responsible way are also more transparent on
their activities. A further limitation of the study
is that an ESG strategy that combines tilt and
momentum criteria could not be tested. This
is due to the limitation of software used in the
analysis.
Despite these limitations, we find that ESG
analysis offers a strong case for investors in
emerging markets. Future research should be
geared towards producing an objective scoring
framework that measures a company’s impact on
the environment, its interaction with society and
its corporate governance standards. Additional
research should also be conducted to determine
which of the three ESG factors (environmental,
social and governance) is most important in
determining stock market and accounting
performance.
CONCLUDING
REMARKS

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