Big Climate Investment Potential in Emerging Economies

Emerging markets tend to be under-represented when investments are climate-aligned, but new Morningstar Sustainalytics research suggests they may be crucial for actual decarbonization in the real world. Investors can rely on an appropriate framework to identify well-performing companies leading climate-related changes in carbon-intensive sectors. The Opportunities to Finance Reduced Emissions in Emerging Markets report deploys evidence-based analysis to help institutional investors tap into value from sustainability leaders in emerging markets.

The paper, authored by Sustainalytics' Director of Climate Thought Leadership Azadeh Sabour and Senior Analyst Mauricio Coronado, explains how investors can assist in enabling decarbonization in traditionally high-emitting regions and less developed regulatory frameworks. Rather than focusing on emissions-led portfolio rebalancing — a common practice among sustainable investing — the study shifts the spotlight to companies actively building climate resilience in their businesses and industries.

A Strategic Framework for Identifying Emerging Market Leaders:-
The paper provides a strategic framework for investment firms seeking effective decarbonization strategies through best-in-class selection, corporate engagement, and direct investment in both public and private equities. The focus of this paper's analysis is the Morningstar Emerging Markets Low Carbon Transition Leaders Index (EM LCTL) — a well-selected index tracking companies listed in emerging markets that are indeed making meaningful progress in climate risk management and low-carbon strategies.

The EM LCTL index is driven by Morningstar Sustainalytics Low Carbon Transition Ratings, a methodology designed to measure the capacity of companies to manage transition risks and capitalize on opportunities in a low-carbon economy. The constituent companies are assessed across four pillars:

Strategic Ambition: Firm commitment to managing climate-related risks.

Action Plans: Clear action steps to reduce carbon intensity.

Metrics: Clearly defined parameters to monitor and report progress.

Governance: Firm control and implementation of climate strategies.

By tracking these elements, the EM LCTL index aims to identify "climate leaders" among companies operating in carbon-intensive environments — those that are not only promising change, but actually delivering it.

Stronger Returns and More Climate Exposure:-
Through April 29, 2025, the EM LCTL index had a year-to-date return of 4.8%, outpacing its parent index — the Morningstar Emerging Markets Target Market Exposure Index, which returned 2.9%. On a one-year basis, the EM LCTL returned 11.9%, compared to 7% for its parent benchmark. The disparity not only reflects better performance, but also more focused exposure to companies that are actually working toward climate resilience.

It quotes that as per Morningstar, the EM LCTL index has 13% higher exposure to companies with high ratings on low carbon transition readiness, or these companies are best placed to succeed in evolving environmental and regulatory regimes.

The authors illustrate their method using two examples of companies:

Enel Chile SA (ENIC), an electricity utility committed to expanding clean energy capacity.

TCC Group Holdings Co., Ltd. (1101.TW), Taiwan's building materials company with investments in low-carbon manufacturing technologies.

They show how, far from merely catching up, some emerging markets are at the forefront of creating sector-specific low-carbon models.

Bridging the Gap Between ESG Ambitions and Real-World Impact
The paper highlights a significant difference between decarbonizing at the portfolio level (which traditionally refers to the exclusion of high-emitting firms to upgrade a portfolio's mean emissions grade) and actual-economy decarbonization (which refers to favoring the restructuring of high-impact businesses into cleaner modes).

Azadeh Sabour points out that a number of businesses in emerging markets are further behind in their journey to sustainability compared to their counterparts in developed economies. That being said, an earlier stage does have enormous upside potential for those investors willing to invest in longer-term change. The EM LCTL index structure offers a pathway for investors looking for more than ESG window dressing — more than optics — who are seeking real climate impact.

Rather than taking capital from high-emitting industries, the report encourages support and investment in businesses that are actively engaged in decarbonization. This is in line with growing institutional practice that emphasizes the role of transition finance in managing climate change at scale.

Implications for Investors and Future Strategy:-
For institutional investors like pension funds, sovereign wealth funds, and ESG asset managers, this report makes a compelling argument to expand their sustainable investing lens to emerging markets. Through the use of evidence-based metrics like the EM LCTL index, businesses can avoid the risk of greenwashing while having a tangible environmental impact in those regions that are most in need.

The observations also tell a broader narrative of sustainable finance: the next wave of climate investing opportunities may not only be in tech-advanced Global North firms, but in industrial upstarts in Asia, Latin America, and Africa that are transforming traditional sectors.

Morningstar Sustainalytics' study is a refreshing antidote to traditional ESG investing, which sometimes seems to favor developed markets and low-carbon sectors. The paper's rigorous approach and measures of performance show how sustainable investing can be an engine for worldwide transformation — one that leads companies toward a greener future, regardless of their starting point.

Source/Credits:
According to the research report "Opportunities to Finance Reduced Emissions in Emerging Markets" by Morningstar Sustainalytics (2025). Summary drawn for educational and information purposes.