Fund Managers Find Alpha in 'Artificially Low' ESG Scores

A lack of reliable ESG data in emerging markets is proving a boon for some of the heavyweights of global finance.

Federated Hermes Ltd. is among investment firms that have spent the past year building its ESG exposure to emerging markets, where it says “artificially low” environmental, social and governance ratings have created openings for investors willing to do their own research.

The “mainstream” ESG ratings firms often give emerging-market stocks a lower ranking because of fewer disclosures relative to companies listed in the developed markets, said Martin Todd, a portfolio manager at Federated Hermes.

That’s created “some really interesting valuation opportunities,” he said in an interview. “Emerging markets overall have come back to a really attractive valuation and it’s a region where we see a lot of ESG names overlooked by investors.”

Federated Hermes is investing in banks in under-developed markets, particularly those that seek to include vulnerable individuals who wouldn’t normally have access to a bank account. Getting a foot in now is key, “as these economies develop and as banks develop and use more technology, more and more people enter the financial ecosystem,” Todd said.