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Emerging markets must navigate ESG trade-offs, says analyst

Mr Müller notes that investors now take a more philanthropic approach, in that they want to do something good.


EVEN amid trade tensions and worries about relations between North Korea and the US, investors may be viewing climate change as the biggest macro-economic risk ahead, a top analyst from Deutsche Bank Wealth Management has said.

But there are difficult trade-offs that emerging markets would have to consider between economic development and protecting the environment, observed Markus Müller, global head of the chief investment office of Deutsche Bank Wealth Management, in an interview in Singapore.

"Emerging markets want to grow, and they have to grow. If you want to grow, it's not immediately possible without a degree of pollution."

Today, Deutsche Bank's research on all companies in the EuroStoxx50 index includes a dedicated section offering environmental, social and governance (ESG) information and guidance.

Against this backdrop, Mr Müller said, it is important for companies operating in emerging markets to boost transparency at this point by disclosing plans to make that transition to green energy.

As it happens, technology to build more sustainable forms of energy consumption is now more readily available and more affordable, and the transition in energy sources can be made easier and shorter in emerging markets, he noted.

Indeed, the International Renewable Energy Agency notes that the average cost of utility-scale solar photovoltaic has plunged by 73 per cent since 2010, and by 23 per cent for wind-generated energy.

The inter-governmental body has also estimated that the cost of battery-storage technologies will fall by as much as 60 per cent in the coming decade.

To be sure, Mr Müller said, such developments in green energy take time.

Looking back on how attitudes have changed in Germany in the last 30 years, he said, in reference to the political party that champions sustainability issues:

"When I was a child, everyone laughed about the Green Party. But these guys were the inevitable pre-requisite for a mindset change."

There is some urgency in the matter, given that investors are increasingly taking ESG factors into account before putting money on the table.

"We see now a change in behaviour - in investors having a more philanthropic approach. They want to do something good," he said.

More research is showing that doing good and doing well can go together.

The better risk-adjusted performance is "logical", but investors are noticing the benefits more than ever before, said Mr Mr Müller.

For example, a report from Deutsche Bank Wealth Management cited studies showing that sophisticated ESG investment strategies may have "strong downside risk management potential". In other words, such returns would be better on a risk-adjusted basis.

Similarly, research looking at more than 3,000 global bonds across industries showed a financial reward for good ESG practices through lower bond spreads, the report showed.

ESG practices include supporting local communities, achieving higher levels of marketed product safety and quality, and avoiding of controversies over the company's workforce.

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