by Stephan Pouyat, Global Head of Capital Markets and Funds Services, Euroclear
ESG: Making a country's credentials count
In my last two blogs I have been looking at the growth of ESG investing from an investor perspective. But what about the issuer/country perspective? What can emerging markets do to encourage greater capital flows to fund infrastructure, social and other projects?
With market volatility and global rates on the rise, how countries present their credentials to investors is of critical importance. There are two sets of issues to consider – performance-related issues and structural ones.
Environmental management is a good example of the performance issues countries face. Large numbers of emerging market nations rank low on the Environmental Performance Index (EPI), first devised some years back by Yale and Columbia universities in collaboration with the World Economic Forum and the European Commission.
A lowly ranking may be a handicap in attracting ESG money – not least as environmental degradation can ultimately lower a country’s potential growth rate. But these countries can still offer some surprising opportunities for ESG investors.
Take China, ranked 118th on the EPI (out of 178 countries). We all know the air quality issues that plague the country’s cities. But how many of us also realise that China leads the way in solar power?
Last year China installed 50 gigawatts (GW) of new solar capacity – more than half the 95GW of new capacity installed worldwide. That was more than three times the volume of two years earlier.
The country ranks as the world’s top job creator in renewable energy. It produces two-thirds of the world’s solar panels and half of the world’s wind turbines. It already boasts the largest market for electric cars.
India, ranked 155th on the EPI, is at an earlier, but equally impressive, stage of solar power expansion. Solar generation capacity has risen eightfold since 2014 and the country has jumped to seventh in the solar power rankings worldwide.
Last year it unveiled what at the time was the world’s largest solar farm as part of a 5GW increase in capacity. It wants to reach 100GW of generating capacity from solar by 2022, up from the current 20GW.
There are also plans for all 12 of India’s government-owned ports to be powered by solar and wind energy with the next few years – something that would rank as a world first.
Last year I recounted how several years’ of work with the Peruvian ministry of finance and regulators had finally paid off by making the local government bond market fully accessible – Euroclearable – to international investors.
That is now allowing Peru to cut its reliance on dollar borrowing. The weighting of Peruvian bonds in the JP Morgan’s Emerging Marketing Index has also risen, helping to attract in more investors and creating a virtuous circle.
Peru is just one example of how a managed process of market reform that enables international investors to invest more easily – and with confidence – can transform the picture.
At Euroclear, we have helped several other markets put in place the structures and regulatory framework that allow investors to consider these securities on their merits – without having to make secondary judgments about security, efficiency or cost.
This almost invariably leads to deeper liquidity in the domestic market, facilitating a reduction in bond yields.
At Euroclear we are in continuing discussions with capital markets around the world about ways in which they can align their regulatory and market practices with the open and resilient frameworks international investors look for.
My colleague at IIF, Sonja Gibbs, notes that clear communication and fair treatment of creditors are an important part of such frameworks, as enshrined in the Principles for Stable Capital Flows and Fair Debt Restructuring.
In fact, during a recent ESG emerging markets conversation with Sonja we discussed the importance of governance and the incurrence of debt, particularly in light of recent episodes of debt distress that have revealed undisclosed debt in some emerging and frontier markets.
Recent industry initiatives to increase transparency in lending – including sovereign, quasi-sovereign and private placements – should help improve investor confidence.
It is a fact of life that where barriers to international investment persist, a market can find itself at a disadvantage in the competition for capital flows – however persuasive the investment case may otherwise be.
As Global Head of Capital Markets and Funds Services at Euroclear, Stephan Pouyat cares passionately about aligning the financial sector with moves to accelerate development among the world's emerging economies.