ESG and emerging markets are “difficult partners” but there are approaches that can be taken to avoid ESG investment conflicts, Capital Partners investment director, Jeremy Cunningham, has said.

Cunningham made the comments at the Irish Association of Pension Funds (IAPF) Investment Conference 2024 in Dublin this week. He was responding to a question from a delegate who posed whether, from a pension fund perspective, there are conflicts with investing in EM debt due to a push for pension investors to be more ESG-focused.

“ESG and EM are difficult partners, I think,” Cunningham responded. “When we think about how one would approach that. What is important, and this is the approach that we take is you have to identify the key factors between the ‘E’, ‘S’ and the ‘G’. So, what we are utilising is third party metrics in order to really understand each of those and then what we’ll do is construct a proprietary score using that data, to see where an individual sovereign will sit relative to each other.

“We then take that score of that particular sovereign nation and then compare it against its gross national income. The thesis being that the more wealthy the economy, the stronger it should be from an ESG perspective. It’s that relationship between wealth and quality of its ESG status. That is one way of looking at a sovereign nation.”

However, he said it becomes more challenging when considering the engagement process. Cunningham stressed how it is different to investing in corporates where you can engage with the board on ESG matters.

“Clearly in the sovereign world it is hard, and we have to be truthful about this. You can have conversations with the treasurers etc, and we do, but clearly, we recognise it's not necessarily going to make a huge difference with respect to their behaviour.

“The only other route that we can take, if anything falls below the line of the gross national income/ESG score line, we will not invest in it.”

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