Transitioning to Sustainability: The Crucial Role of Emerging Markets

Emerging markets (EMs) offer a wide range of compelling investment opportunities that are often overlooked. EM countries also play a critical role in pursuing sustainability in the global economy. They typically outpace most developed economies in terms of GDP growth, with populations growing faster than in the developed world. By 2035, EM countries are expected to drive roughly 65% of global economic growth, due to supportive demographics, abundant natural resources, and evolving trade dynamics.¹

Many EM countries are becoming hotbeds of innovation. For example, India has seen a surge in tech startups, with cities like Bengaluru emerging as global tech hubs. Innovations in fintech, health care, and renewable energy are transforming these economies while offering solutions to global challenges. However, investing in EMs comes with its share of risks, including environmental challenges.

Rapid industrialization in EMs and an expanding middle class are making EM countries increasingly attractive, both for their consumer markets and manufacturing hubs that serve as key components of global supply chains. However, these same factors are increasing the demand for transportation and electricity, making sustainable development a critical issue for EMs. Investments in renewable energy projects, such as solar farms in India and wind energy in South Africa, are helping to address this. Countries like Brazil and Indonesia are promoting sustainable agriculture to help protect their rich biodiversity.²

How Can Emerging Markets Balance Carbon Intensity and Resource Wealth?

Many EM countries are home to both carbon-intensive industries and abundant natural resources. Addressing the significant increase in EMs’ carbon emissions will require substantial investments in clean energy technologies. This points to an opportunity for investors who recognize that while not all companies will be leaders in sustainability, many will benefit from supporting the transition to a lower-carbon world.

Investing in sustainable growth in EM economies can also have significant social benefits, such as reducing poverty and improving quality of life. This, in turn, supports more economic growth in a positive feedback loop.

Building Sustainable Supply Chains: The Role of Emerging Markets

The COVID-19 pandemic and its aftermath taught the world a master class on complex supply chains, which are essential to businesses and consumers globally. EMs that are a big part of these supply chains are major sources of greenhouse gas emissions, use natural resources inefficiently, and generate significant waste.

Improving supply chain sustainability may involve favoring innovators that are showing EM-based mining companies and factories how to increase energy efficiency, or agricultural exporters that pursue sustainable or regenerative agricultural practices. Businesses that support sustainability in EMs can produce economic benefits through increased efficiency, reduced waste, and improved resource management. Emphasizing sustainability in supply chains can also promote ethical labor practices, fair wages, and safe working conditions that are lacking in many EM countries.

Supporting sustainable development in EMs will require significant investments in clean energy infrastructure and other sustainability-oriented technologies. Financial support from both not-for-profit organizations and private investors is essential to bridge the funding gap between what is needed and what EM governments can provide.

The World Benchmarking Alliance highlights the critical role of EM countries in achieving global sustainability goals. However, it also points out that some investment strategies, particularly those that call for avoiding certain industries altogether, may actually reduce investment in EM innovators that support sustainability goals.

Our Approach to Sustainable Investing in Emerging Markets

American Century’s Emerging Markets team believes that EMs offer investors compelling opportunities in areas outside the developed markets that are home to most of the best-known sustainability leaders. The team has a long track record of integrating financially material sustainability factors into investment strategies and analyses, and recently leveraged this expertise to create the Emerging Markets Transition (EMT) strategy. The EMT strategy comprises 50-70 companies committed to improving sustainability in a way that may be overlooked, while emphasizing improving fundamentals and accelerating growth.

Specifically, the team uses quantitative and qualitative performance metrics to identify companies on an established “Improvement Pathway”, categorizing them as Sustainability Committers, Operational Improvers, and Sustainability Enablers.

American Century’s EMT strategy offers investors an opportunity to earn competitive returns from companies helping their local economies grow while benefiting the world around them as they transition to greater sustainability.