Introduction
Three years ago, we launched the Emerging Markets Sustainable Blended Debt Strategy. The broad aim was to help investors tap into the best opportunities among countries with improving ESG trends, while providing exposure to sustainable investments including green, social, sustainable, sustainability-linked and supranational bonds.
The strategy is underpinned by the following beliefs:
- Focusing on better ESG dynamics does not mean sacrificing returns.
- Countries with improving ESG metrics will build sustainable economies and can unlock higher productivity, leading to outperformance of their assets.
- Engagement is necessary to help improve ESG metrics.
Here we share insights gained over the past three years of managing the strategy.
01Sustainable investing in emerging market debt can deliver alpha
The Emerging Markets Sustainable Blended Debt Strategy was built on our belief that countries with improving ESG metrics will forge more sustainable economic paths, and that this should help their assets outperform over the long run. In other words, investing in emerging market (EM) countries on sustainable development paths should lead to a positive risk-return outcome for long-term debt investors.
While three years is a relatively short time frame for such dynamics to play out, the behaviour of the strategy since inception lends support to this view. The strategy has achieved annualised alpha, gross of fees, of 2.7%.
Figure 1: Strategy composite performance (USD, %)
| Calendar (%) | 2021 (Oct) | 2022 | 2023 | 2024 (YTD) |
| Composite (gross) | -0.6 | -10.8 | 12.1 | 8.8 |
| Benchmark | -1.5 | -14.9 | 11.7 | 6.7 |
| Active return | 1.0 | 4.1 | 0.4 | 2.1 |
Past performance does not predict future returns; losses may be made.
Source: Ninety One, 30 September 2024.
Performance is gross of fees (returns will be reduced by management fees and other expenses incurred), income is reinvested, in USD.
Performance start: 01 October 2021. Strategy: Emerging Markets Sustainable Blended Debt. Benchmark: 50% JPMorgan GBI-EM Global Diversified Net; 50% JPM EMBI Global Diversified. Indices are shown for illustrative purposes only.
Portfolio insights
Investments in the portfolio focus on countries where we see improving sustainability dynamics, regardless of their starting point. Given its focus on sustainability trends, the portfolio is almost exclusively invested in countries that are moving in the right direction. Only a very small share is allocated to countries on a negative trend, but this is implemented via either supranational bonds or green, social, sustainable and sustainability-linked (GSSS) bonds.
Among our highest-conviction positions from a sustainability perspective, Costa Rica and Chile have been key contributors to performance since inception. Furthermore, underweight positioning in the lowest ESG scorers has had a significant positive impact on relative returns. A notable example is Russian debt; its absence – on sustainability concerns – from the portfolio was beneficial after bond prices were marked down to zero when Russia invaded Ukraine. That said, underweight positioning related to sustainability concerns can hold back performance over shorter time frames; the absence of exposure to Turkey in the portfolio has meant the strategy could not benefit from the outperformance of Turkish local currency debt this year. While the significant macro adjustment that has driven this outperformance is encouraging, broad ESG trends are not sufficiently positive for us to include Turkey in the portfolio at this point.
The nature of our proprietary ESG scores – namely, a forward-looking, qualitative assessment of ESG trends – also means the portfolio has avoided sector or defensive biases. Typically, that’s not the case for approaches that rely on third-party ESG data, which tends to be backward looking with a bias towards high-income countries – often translating into a quality/low-yield bias in portfolios.
02Opportunities to make a positive impact are plentiful
In addition to delivering on its return objectives, the strategy has also been able to make a positive contribution to a variety of sustainability related activities via its direct investments in GSSS bonds.
Upon launching the strategy, the GSSS market was already starting to take off. Even so, the growth in number and breadth of opportunities has been surprisingly impressive, as we charted here. This has meant that even when using our in-house sustainable bond selection criteria (which is aligned with Emerging Markets Investors Alliance’s enhanced labelled bond principles), we’ve easily surpassed the portfolio’s target of a minimum of 30% in sustainable investments including GSSS and supranational bonds, as shown in Figure 2.
Figure 2: Evolution of sustainable bond* exposure in the strategy
Source: Bloomberg, Ninety One, as at 31 August 2024. *Sustainable investments include: green, social, sustainable, sustainability-linked, supranational bonds, and bonds issued by Development Finance Institutions that pass our assessment.
Investment case study: Uruguay
Uruguay’s Sovereign Sustainability-Linked Bond (SSLB), first issued in October 2022, directly links the country’s financing strategy and cost of capital to the achievement of its climate and nature-based goals set under the Paris Agreement.
| Target | Progress |
| Reduction of greenhouse gas (GHG) emissions intensity To achieve at least a 50% reduction in aggregate gross GHG emissions intensity by 2025, from the 1990 base year. |
By the time of issuance in 2022, Uruguay had already achieved a 46% reduction in GHG emissions intensity. During 2022, GHG emissions decreased a further 4.1% year-on-year, leading the reduction target being updated to 52%. |
| Maintain native forest area To maintain at least 100% of the native forest area by 2025, from the 2012 base year. |
The latest data available (reported for 2021) showed 100% maintenance of the native forest area with respect to the base year. Data is reported every four years. During 2022, the country completed the first stage of the Reduction of Emissions from Deforestation and Forest Degradation (REDD+ project). |
Investment case study: Benin
The sustainable bond issue in 2021 was a first for Benin and for the African continent. Proceeds from the issuance will be used to finance the country’s progress towards the United Nation’s Sustainable Development Goals (SDGs).
| Target | Progress |
| SDG4: Quality education By 2030, to expand educational services and improve the capacity to take on students. |
Between 2020 and 2022, there was a 6% increase in
primary school education enrolment, plus 389,346
new beneficiaries of school canteens. During 2022, just under 10,000 new teachers were recruited. |
| SDG6: Clean water and sanitation By 2030, to ensure universal and equitable access to safe and affordable drinking water. |
The bond has financed seven projects to ensure access to drinking water and sanitation for all: two in rural areas; four in urban areas; and one structuring project in the water sector. |
This is not a buy, sell or hold recommendation for any particular security.
03Data enhances the quality of engagements
Another key tenet of the strategy is that engagement with issuers can help improve sustainability dynamics in the issuing country. Again, this is a long-term endeavour. But in the three years since the strategy launched, we’ve found data-driven conversations to be among the most fruitful. We have generally found that policymakers respond well to being shown concrete measures of how they are scoring across a variety of metrics and engaging in a two-way discussion around how to improve.
Several proprietary tools have proven useful in this regard. In 2020, we launched the Climate & Nature Sovereign Index, which quantitatively assesses the long-term risks relating to climate change and nature loss at a country level. The following year, we launched the Net Zero Sovereign Index, which provides an independent, quantitative assessment of a country’s progress towards net zero, within the context of a just transition. More recently, we have created a Sovereign Biodiversity Index - the next quantitative tool underpinning our Environment score for emerging countries1.
An example of where our Net Zero Sovereign Index has been particularly helpful is in discussions with Chile’s Debt Management Office. Chile has ambitious targets – also reflected in its sustainability-linked bond key performance indicators – to increase the share of renewable energy to 60% by 2032. We used our Net Zero Sovereign Index to encourage continued progress in the development of renewables (an area of strength) and to understand bottlenecks around upgrading transmission lines. The index also highlighted areas where Chile lags peers, e.g., it has a high level of energy intensity given the importance of the energy-hungry mining industry in the country and from inefficient energy subsidies (introduced during COVID). We learned of plans to adopt electric vehicles in the state-owned mining company. This, together with the gradual removal of energy subsidies, is something we are monitoring.
Net Zero Sovereign Index snapshot - Chile
CO2 emissions per capita – 5-year trend
Total primary energy supply per capita
Change in renewable energy share – 5-year trend
Current TPES2/capita vs. ‘well below’ 2C pathway
Composite emissions target assessment3
Energy subsidies % GDP
Source: Net Zero Sovereign Index, Ninety One, as at 31 October 2024.
In summary
While three years is a relatively short time frame for sustainability dynamics to play out, the behaviour of the strategy since inception lends support to our view that sustainable investing in EM debt can deliver alpha. Since managing the strategy, we’ve witnessed impressive growth in the sustainable bond market, where we have found ample opportunities to make a positive contribution to a variety of sustainability related activities. We have also found that our Net Zero Sovereign Index has enhanced the quality of our engagements with policymakers.
1 For more details on the Climate & Nature Sovereign Index and Net Zero Sovereign Index please see: https://ninetyone.com/en/insights/no-one-left-behind
2 TPES/capita is defined as “Total primary energy supply per head of population.
3 A composite indicator from the Net Zero Tracker including Nationally Determined Contribution target status, interim targets, scope, reporting, equity and accountability.
Source: Ninety One Net Zero Index 2023. For illustrative purposes only. For further information on investment process, please see the Important information section.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific strategy risks: Emerging Markets Sustainable Blended Debt. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market. Emerging and Frontier market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems
