(3BL Media/Justmeans) – The environmental footprint of global companies has an economic cost that affects their valuations and competitiveness. The risk of environmental damage increases when these companies have a substantial presence in emerging markets. Even institutional investors with significant exposure to emerging markets may have liabilities for unsustainable operations in the developing world.
The challenges for sustainable investing in emerging markets are often quite different than in developed markets because of the unique nature of emerging economies. Poorer countries tend to be more dependent on natural resources, and transforming those resources into goods and services tends to have a significant, and often value-destroying, environmental impact.
According to the World Bank, even the largest emerging economies, such as China, Brazil, Russia, India and Mexico, are much more dependent on agriculture and industry compared with the largest developed markets, which are more service-oriented. The largest environmental footprints are often in sectors that involve conversion of raw materials into intermediate or finished products.
This process typically involves agriculture, mining and energy production, which can present environmental and social hazards, such as a heavy demand for water and large emission of greenhouse gases. Unlike the developed countries, these impacts may not be so well regulated in the emerging markets.
Multinational companies that operate in emerging markets are more likely to have better investment performance when their environmental impact is understood and managed, and care is taken to mitigate impacts.
A 2014 paper by a group of Canadian, American and South Korean academics – “Corporate Responsibility and the Cost of Capital: International Evidence” examined equity capital costs in 30 countries over a 10-year period. It revealed that higher environmental responsibility was positively and significantly correlated with lower cost of equity capital. Corporate and institutional investors can capitalize on this advantage by focusing on sustainable investing in emerging markets.
Source: Pi Online
Image Credit: Flickr via Clinton Global Initiative
This post was originally published on Justmeans.com
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