This week is Good Money Week, a national campaign promoting responsible investing.
Can this be applied to property too?
Dominic Rowles, an analyst at business consultancy Hargreaves Lansdown, says:
“Countries that struggle with environmental degradation, social inequality, or poor governance can create an unstable investment landscape, leading to a volatile regulatory regime, civil unrest, or economic downturns that negatively impact returns.
“When people think about Environmental, Social and Governance (ESG) risks, they generally think about the amount of carbon emissions a company spits into the atmosphere, or how senior managers are incentivised.
“But country-level ESG risks can be just as important. They can significantly impact the stability and growth potential of investments within those nations.”
Environmental risks
Rowles suggests that nations usually have the resources to invest in sustainable infrastructure, clean energy and new technologies to mitigate environmental risks.
Countries like Norway, Germany and New Zealand are leading the charge in switching to renewable energy sources to reduce their dependence on fossil fuels.
Developed countries also tend to enforce stringent environmental regulations, thereby helping to manage risks like climate change, pollution and biodiversity loss. Wealthier countries can also better adapt to environmental changes.
He comments: “The Netherlands, for instance, has invested billions in flood defences and water management systems in response to rising sea levels. Others have developed early warning systems which help them to prepare for natural disasters and reduce the human and economic costs.
“In contrast, emerging economies are often more reliant on industries like agriculture, which makes them more vulnerable to climate-related events. Nations in South Asia, for example, face significant risk of droughts, floods and rising temperatures, which can devastate crops and livelihoods.”
Social risks
Social factors like education, healthcare, and community relations are crucial for building a healthy, motivated, and skilled workforce.
Scandinavian countries, such as Sweden and Denmark, are renowned for their robust welfare systems, which help reduce risks like inequality and health crises. Less developed countries often face high levels of poverty and inequality, exacerbating social tensions and hindering economic growth.
This instability, combined with weaker healthcare and education systems, makes these regions more vulnerable to crises and less attractive for investment.
For example, several African nations have struggled with high levels of poverty and weak public services, making it challenging to seize economic opportunities.
Governance risks
Rowles continues: “Wealthier countries typically have more established institutions and regulatory frameworks which help ensure transparency, accountability and the rule of law.
“The UK is home to one of the oldest democracies on the planet, and along with other developed economies like Japan, Australia, New Zealand and many of the Scandinavian countries, it often ranks among the best governed countries worldwide.
“This helps create a stable and predictable business environment and attract foreign investment. Wealthier countries also have the capacity to enforce anti-corruption measures and protect property rights.”
Emerging markets are often characterised by weak institutions, corruption and political instability. These issues can create an unpredictable business environment and can also lead to a vicious cycle where poor governance undermines development, worsening social and environmental problems.
In countries like Bangladesh, corruption remains a big issue and can divert resources from critical projects, while political instability hampers long-term policy implementation. It remains to be seen how ongoing political changes in the country will impact its long-term prospects.
Why it’s still worth considering an investment in emerging markets
Rowles adds: “Despite the increased risks of investing in emerging markets, we still think some exposure can be a good idea for many investors. Emerging markets are the engine of global growth and home to some of the most dynamic economies on the planet.
“They’re hotbeds of innovation and technology is an increasingly important part of what they do. From smartphones and IT services to some of the world’s biggest online shopping platforms.
“However, it’s important to take steps to mitigate the additional risks of investing in emerging markets by investing for the long-term and diversifying your investments across many industries and countries.”
