Emerging Market Funds with an ESG Dimension Offer Opportunities for European Managers and Investors

EM Funds with an ESG Dimension Offer Opportunities for European Managers and Investors

Scope for more environmental, social, and governance emerging market funds

January 2019, London. Emerging market (EM) funds that cater to the surge in demand for environmental, social, and governance (ESG) investments could well be a growth area in 2019, according to latest issue of The Cerulli Edge―European Monthly Product Trends.

Cerulli Associates, a global research and consulting firm, notes that EM fund flows stood up well in 2018, even amid negative returns, and believes that EM may be a buying opportunity for short-term players. After a 37% surge in 2017, the main MSCI EM index lost more than 14% in 2018, underperforming developed markets.

“Several products have been launched in the ESG EM space in the past year, but we believe there is room for more. At the end of 2018, only around 40 Europe-domiciled EM funds had terms such as ESG or SRI (socially responsible investing) in their name, including a handful of exchange-traded funds (ETFs),” says André Schnurrenberger, managing director, Europe at Cerulli. “Total assets under management have risen more than fourfold in three years, albeit from a low base, and now stand at around €7 billion (US$8 billion).”

The question of how the term ESG is understood in EM is crucial and the dynamics of issues such as governance and green investing can be different in such markets. In China, for example, standards on several issues are out of sync with those in the West and index compilers have excluded many Chinese companies based on their lack of transparency.

Some asset managers are addressing the variations in ESG themes by offering a range of products. “Those with an early-mover advantage and a willingness to play the long game may be rewarded. The evidence suggests that more than enough investors understand the nuances and care enough to help products reach critical mass,” says Schnurrenberger.

He adds: “ESG in EM is set for further growth and investors want both principles and performance. ESG providers’ marketing departments must work to assure investors that they understand their principles.”

Other Findings:

  • Europe’s ETF market reversed the tide of month-on-month outflows by posting inflows of €2.9 billion in November, lifting year-to-date (YTD) ETF net inflows to €29.5 billion. Cerulli notes that global equity ETFs were primarily responsible for driving the recovery, with net inflows of €2.3 billion, followed by North American equities, which gathered €2.2 billion in November and €17.2 billion YTD.
  • November was the first month in 2018 that the German market posted net outflows, says Cerulli. In terms of asset classes, bond and equity funds were largely responsible, with outflows of €1.3 billion and €0.8 billion respectively. Passive fund net inflows remained low (at €30 million during the month), consistent with the rest of 2018, a year that saw low or negative demand for passive funds in Germany.

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