“China is well positioned in these areas, fuelling the green transition both domestically and internationally”. GAM Investments’ Senior Manager of Sustainable and Thematic Investment, Meera Patel reflects on the latest sustainability considerations in emerging markets.
21 May 2025
Emerging markets are facing a range of challenges and opportunities. On one hand, the push for sustainability is gaining momentum, driven by both local initiatives and global pressures. On the other these markets must navigate economic volatility and infrastructural constraints. With these contrasting dynamics, what is the future of sustainability and what are the resulting investment opportunities in emerging markets?
The sustainability imperative in emerging markets is driven by two key factors:
Firstly, significant and growing carbon emissions, of which Asia (including China and India) contributes 60% to absolute global emissions1. Between 2022 and 2023, emissions from India and China grew by 8.2% and 4.9% respectively2.
Chart 1: Annual CO2 emissions by world region (tonnes)
Source: Global Carbon Budget (2024), Our World in Data: https://ourworldindata.org/co2-emissions, as at January 2024. The views are those of the manager and are subject to change.
Note: Emissions from fossil fuels and industry are included, but not land-use change emissions. International aviation and shipping are included as separate entities, as they are not included in any country's emissions.
Fossil emissions: Fossil emissions measure the quantity of carbon dioxide (CO2) emitted from the burning of fossil fuels, and directly from industrial processes such as cement and steel production. Fossil CO2 includes emissions from coal, oil, gas, flaring, cement, steel and other industrial processes. Fossil emissions do not include land use change, deforestation, soils or vegetation.
Note: Emissions from fossil fuels and industry are included, but not land-use change emissions. International aviation and shipping are included as separate entities, as they are not included in any country's emissions.
Fossil emissions: Fossil emissions measure the quantity of carbon dioxide (CO2) emitted from the burning of fossil fuels, and directly from industrial processes such as cement and steel production. Fossil CO2 includes emissions from coal, oil, gas, flaring, cement, steel and other industrial processes. Fossil emissions do not include land use change, deforestation, soils or vegetation.
Secondly, governance reformation, where poor corporate governance continues to risk destroying shareholder value.
When considering the incorporation of sustainability factors into our investment analysis, our primary aim is to avoid harming returns by favouring companies that, in turn, do not cause harm.
Sustainable and thematic investment opportunities
The MSCI Emerging Markets Index consists of 24 countries, all at varying stages of development, leading to a diverse range of sustainability-related opportunities and risks. These 24 emerging market countries account for 54% of the global population3, contributed 50% to global GDP in 2024 and 66% to global GDP growth over the last decade (2014-2024)4. With an average life expectancy of 75 years and a median age of 34 years old5, along with a growing middle class, the target addressable market across sectors is vast.
Chart 2: The secular demographic support for emerging markets
Source: MSCI report- https://www.msci.com/documents/1296102/38312924/Sizing+Up+Opportunity+in+Emerging+Capital+Markets.pdf, as at May 2023.
The views expressed herein are those of the manager and are subject to change. There is no guarantee that targets will be achieved.
The views expressed herein are those of the manager and are subject to change. There is no guarantee that targets will be achieved.
We are particularly favourable towards demographic supportive themes such as domestic consumer spending on essential services and financial inclusion.
Internet platforms in China providing daily core services such as food delivery and ride hailing are likely to remain popular, despite a wider economic slowdown. This sector is further supported by the broader transition from manufacturing to advanced technologies in line with government policies, resulting in increased salaries and disposable income.
The development of telecommunication infrastructure is a key enabler to providing access to fintech solutions, serving the unbanked and underbanked population, estimated at 24%6 globally, many of which live in emerging markets. Financial institutions providing affordable housing loans and sustainability-labelled bonds (including green and social bonds) are preferred due to increased transparency on fund allocation. We favour companies with strong governance and lending frameworks in place, including alignment with International Capital Market Association (ICMA) guidelines and second party opinions.
In order to identify and monitor sustainable investments, we map companies to UN Sustainable Development Goals (UN SDGs) to assess net positive or negative alignment to various targets defined by the United Nations. Given the high proportion of financials within the emerging markets universe, alignment to UN SDG 8 – Decent Work and Economic Growth – is a dominating theme with the aim of promoting sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all7.
Quality matters
In an emerging markets context, quality takes form in several ways – sovereign credit quality, governance quality and data reliability – all of which have markedly improved over the last decade.
Among the top 10 emerging markets, eight are now investment grade, compared to four out of 10 15 years ago. Emerging market sovereign debt to GDP levels are well below half of developed markets, allowing central banks to remain orthodox with inflation control, which is essential in today’s tense trade environment.
Governance standards among emerging market companies have evolved but still have some way to go. Given the higher risk nature of these investments, governance has always been a key consideration at both the country and company level. For example, at the country level we avoid state-owned enterprises due to information vacuums and limited transparency. At the company level, we focus on board composition (including independence, entrenchment and gender diversity), ownership structures, disclosure and compensation, using our voting power and direct engagement to enact change.
Data reliability and quality remains patchy, but companies are improving disclosure efforts to attract foreign capital. This is driven by the emergence of global standards like the International Sustainability Standards Board (ISSB) guidelines and the International Finance Corporation’s (IFC) Disclosure and Transparency (D&T) Framework, which aims to help businesses in emerging markets align with global reporting expectations. The challenge remains for smaller cap companies and new IPOs requiring close collaboration with management to gather data.
MSCI analysis, using data from the last 11 years, illustrates that companies with higher MSCI ESG Ratings have outperformed their lower-rated counterparts in Asia Pacific equity markets, with the governance factor demonstrating the highest outperformance8. While third-party data providers can provide valuable insights, our core research relies on fundamental analysis and proprietary findings. We maintain an MSCI ESG A rating at a portfolio level to preserve a minimum quality threshold.
Energy Transition
Emerging and developing economies play an essential role in tackling the disastrous effects of climate change such as flash flooding and heatwaves. These economies are disproportionately affected due to numerous reasons including lower reconstruction funding and a lack of insurance on housing and infrastructure.
The key enablers to decouple the relationship between increasing energy use and carbon emissions include affordable technological advancements in clean energy production and storage, capital and policy support. China is well positioned in these areas, dominating supply chains for solar panels, battery metals and green hydrogen, fuelling the green transition both domestically and internationally. Despite US tariffs posing a risk to the renewables sector, we believe long term demand will persist for China’s 140 other trading partners.
Chart 3: Energy related carbon emissions by country, 2015-2035, Economic Transition Scenario
Source: Bloomberg New Energy Finance (BNEF), as at April 2025.
Note: SEA is Southeast Asia, LatAm is Latin America, Sub-S, Africa is Sub-Saharan Africa, MENA is Middle Est and North Africa, APAC is Asia Pacific, Eur. Is Europe. Countries are grouped as ‘going sideways’ where energy-related emissions show a compound annual growth rate of +/- 1% between 2024 and 2035.
Note: SEA is Southeast Asia, LatAm is Latin America, Sub-S, Africa is Sub-Saharan Africa, MENA is Middle Est and North Africa, APAC is Asia Pacific, Eur. Is Europe. Countries are grouped as ‘going sideways’ where energy-related emissions show a compound annual growth rate of +/- 1% between 2024 and 2035.
To monitor and measure climate risk, we actively track the weighted average carbon intensity of our portfolio, which consistently averages 70% below benchmark. It is estimated that half of the companies in the MSCI Emerging Markets Index have not set a net zero target. As part of our responsible investment efforts, we engage with companies to understand the challenges behind setting science-based targets with medium- and long-term goals.
Outlook for sustainable investment
Achieving global climate goals requires the active participation and efforts of all stakeholders globally, especially within emerging economies. This presents significant investment opportunities in companies that are leading the charge in sustainable practices and technologies. By focusing on these areas, investors can not only contribute to global sustainability efforts but also potentially achieve attractive returns. The ongoing transition to clean energy and improved governance standards in emerging markets offer a fertile ground for discerning investors looking to capitalise on these transformative trends.
1Source: Global Carbon Budget (2024), Our World in Data - https://ourworldindata.org/co2-emissions, as at January 2024.
2Source: Global Carbon Budget (2024), Our World in Data - https://ourworldindata.org/co2-emissions, as at January 2024.
3Source: International Monetary Fund (IMF), as at April 2025.
4Source: World Economics - https://www.worldeconomics.com/Regions/Emerging-Markets/, as at May 2025.
5Source: World Economics - https://www.worldeconomics.com/Regions/Emerging-Markets/, as at May 2025.
6Source: World Bank - https://www.worldbank.org/en/topic/financialinclusion/overview, as at January 2025.
7Source: UN – Goal 8 | Department of Economic and Social Affairs - https://sdgs.un.org/goals/goal8, as at May 2025.
8Source: MSCI Long-Term Performance of MSCI ESG Ratings in APAC Equity Markets – MSCI - https://www.msci.com/www/blog-posts/long-term-performance-of-msci/04531705362, as at April 2024.
2Source: Global Carbon Budget (2024), Our World in Data - https://ourworldindata.org/co2-emissions, as at January 2024.
3Source: International Monetary Fund (IMF), as at April 2025.
4Source: World Economics - https://www.worldeconomics.com/Regions/Emerging-Markets/, as at May 2025.
5Source: World Economics - https://www.worldeconomics.com/Regions/Emerging-Markets/, as at May 2025.
6Source: World Bank - https://www.worldbank.org/en/topic/financialinclusion/overview, as at January 2025.
7Source: UN – Goal 8 | Department of Economic and Social Affairs - https://sdgs.un.org/goals/goal8, as at May 2025.
8Source: MSCI Long-Term Performance of MSCI ESG Ratings in APAC Equity Markets – MSCI - https://www.msci.com/www/blog-posts/long-term-performance-of-msci/04531705362, as at April 2024.
Meera Patel is Senior Manager of Sustainable and Thematic Investment, supporting the Sustainable Emerging Equity strategy at GAM Investments.
GAM manages [SFDR article 8] Sustainable Emerging Market Equity and ESG Fixed Income strategies.