Emerging markets are as much at the mercybehest of climate change as those in the developed world. Barings has been making a big push to get this topic into its EM debt management.
In June last year it added ESG assessments and scores for each country under review. One innovative component was a 'resilience' score, which ties to a country's institutional capacity and governance as well as how the COVID-19 pandemic would impact the country's health, social and economic stability. Barings found that EM countries managed the pandemic differently, and, in some cases, the effects caused shifts in politics – particularly in Latin American countries like Bolivia, Peru, Chile and Ecuador, to name a few.
This resilience score helped it in evaluating how countries prepare for, and react to, climatic disasters and it impacted positions and the outlook for numerous countries.
For example, Barings was heavily overweight El Salvador going into COVID-19, which prior to the pandemic, ranked high in institutional and social factors and looked positive in terms of creditworthiness and ESG scores. However, as countries emerged from the pandemic, it found that El Salvador's economic performance had deteriorated. With no signs of improvement for the foreseeable future in the country and its limited ability to manage shocks, the company decreased its position to an underweight.
Similar calls were made on other countries. The upshot of the innovative analysis is that Barings' EM portfolios have performed well in tough times – and been rewarded by strong investor inflows. Total dedicated EM sovereign debt assets grew from $2.6bn to $4.7bn between June 2020 and June 2021. Total dedicated EM corporate debt assets grew from $4.1bn to $5.1bn during the same time.