Public Fixed Income

ESG: Managing Climate Risk in EM Corporate Debt Portfolios

June 2021 – 7 min read
EM companies are making strides when it comes to capturing and disclosing climate risks, but there is work still to be done. Encouragingly, investors and managers are often able to go a few steps further to fill the gaps.

Call to Action

As average temperatures rise around the world, climate science finds that acute hazards such as heat waves and floods are growing in frequency and severity, and chronic hazards such as drought and rising sea levels are intensifying. Emerging market (EM) countries, in particular, tend to be more exposed to climate change risks relative to developed markets, largely due to geography, higher carbon intensity (given the exposure to commodities), and their more limited ability to deal with shocks. In fact, almost all EM countries are likely to be negatively affected by at least one of the two major economic impacts from climate change: the direct impact from higher temperatures on the economy and the need to reduce carbon intensity—and many countries by both. For instance, China, India, Indonesia, South Africa and Turkey, all of which have above-average carbon intensity levels, are expected to see a negative impact from climate change on GDP.1

It may come as no surprise, then, that many EM countries have responded to this issue by launching and implementing sustainable finance policies and frameworks. Several countries have also strengthened their commitments to achieve net-zero emissions by 2050, or in the case of China, 2060, with the rollout of a multitude of regulations—from the Paris climate accord to the EU Green Deal to proposals for carbon taxes on goods—aimed at mitigating or reducing climate risk. 

For EM corporates, mitigating climate risk begins with identifying and quantifying greenhouse gas emissions (GHG) and carbon intensity.

1. Sources: Bank of America, Burke Hsiang Miguel (2015), Global Carbon Atlas, IMF. As of April 2021.

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Omotunde Lawal, CFA

Head of EMEA Corporate Credit and Emerging Markets Corporate Debt

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