Capital meets climate

June 12, 2025

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As investor demand for sustainable and climate-aware finance accelerates, ESG, green and sustainability-linked bonds are becoming more prominent in the emerging market debt universe, write Warren Hyland, Yiannis Bartzilas and Archie Beeching.

Emerging markets have undergone a profound transformation in recent decades. Once seen as a high-risk niche, today EM debt is a multi-trillion dollar asset class spanning many countries. Additionally, it is increasingly being shaped by sustainability considerations. This expansion reflects both the scale and urgency of global sustainability challenges - and the critical role EMs are playing in addressing them.

As investors seek to align portfolios with climate goals and diversify away from developed market headwinds, EMs could offer compelling opportunities. From India’s leadership in renewables to China’s dominance in electric vehicles, emerging economies are driving innovation in clean energy, transportation and other infrastructure. As such, these markets present a rare opportunity to embed sustainability from the ground up. At the same time, regulatory and disclosure frameworks are reshaping capital markets, making carbon footprinting tools central to investment analysis. For long-term, impact-driven capital, EMs are no longer peripheral.

Defining change

Much has changed in the 35 years since the beginnings of the EM bond market with the first so-called ‘Brady’ bond;¹ today’s asset class totals US$28.5 trillion, with 86% of the debt issued in local currencies (Figure 1).

During this time, the investible universe has grown to incorporate the rise of frontier markets, enabling investors to gain exposure to over 100 EM countries at different stages of economic growth and development. The universe also includes US dollar hard-currency corporates, a subsection that is now larger than its sovereign peer (US$2.5 trillion vs. US$1.5 trillion). More recently we have seen the growth of the labelled (sustainable) debt universe (Figure 2), which now exceeds US$1 trillion.²

Figure 1: EM debt stock by sub-asset class, USD trillion

Source: JP Morgan, as of 22nd October 2024 ‘EM as an Asset Class Evolves and Diversifies’. For illustrative purposes only. 

Green bonds account for 67% of labelled debt issuance, followed by social bonds (17%) and sustainability bonds (11%). Corporates are the main issuers, representing 58% of the total — split between 45% non-financial and 55% financial institutions. While 68% of labelled bonds are in local currencies, a significant portion, US$339.9 billion, is in hard currencies.

Investment in labelled EM corporate debt continues to outpace issuance in developed market (DM) credit and EM sovereigns. This should not surprise investors. By definition, ‘emerging’ markets are at a critical stage of development, where infrastructure and energy systems are still being built. This creates a distinctive opportunity to integrate sustainability into an economic strategy at an early stage, supporting clean energy, biodiversity, climate resilience and social housing as these economies mature.

In contrast, some DMs have experienced policy setbacks that have slowed the progress of environmental, social and governance (ESG) initiatives. Environmental regulations have been rolled back, international climate cooperation weakened and the transition to renewable energy momentum lost. These developments have reduced the urgency for domestic companies and investors to prioritize ESG goals, contributing to a widening gap between EMs and certain DM countries. At the same time, the importance and scale of labelled debt within EM corporate markets have grown significantly.

Measuring carbon in client portfolios

The 2015 Paris Agreement, adopted by 195 countries at the COP21 climate conference in Paris,³ has combined with increasing calls for disclosure and transparency via frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) to increase the shift towards decarbonisation.

Investors are increasingly aligning their portfolios with the goals of the Paris Agreement by reducing carbon emissions, aiming for net-zero by 2050. EM policymakers face the challenge of balancing economic growth with reducing their reliance on legacy fossil fuel-based infrastructure to meet climate goals or Nationally Determined Contributions (NDCs).⁴ A central pillar of the Paris Agreement is the notion that DMs must support EM economies in reaching their climate goals.

As a result, many funds now integrate ESG and Paris-aligned benchmarks, shifting capital toward less carbon-intensive sectors and companies, and divesting from heavy polluters. Part of the collaborative industry effort has resulted in the development of carbon intensity metrics, such as weighted average carbon intensity (WACI), designed to allow comparisons of carbon intensity across different portfolios or indices.

Investors must gather reliable emissions data, reported or estimated, for each holding, normalize it by revenue and weight it according to the portfolio’s allocation. This allows investors to compare the climate impact of different funds, align with ESG regulations, and meet transparency requirements under the EU Sustainable Finance Disclosure Regulation (SFDR). WACI is particularly valuable for identifying carbon-heavy sectors within diversified portfolios and supporting climate-conscious investment decisions.

While investors may, at first glance, think EMs may be more likely to be carbon-heavy emitters, it is possible to significantly reduce the WACI of strategies (relative to their respective investment universes) by lowering exposure to carbon intensive energy and utility sectors, which can be supported by thermal coal exclusions, without compromising diversification/performance.

Sustainable investment opportunities in EM

Beyond offering opportunities to reduce carbon intensity, EMs also offer a growing array of sustainable investments across sectors and regions. India stands out for its ambitious push into renewable energy, supported by government policy and foreign investment. With targets to tender 50GW of renewables annually and reach up to 1,800GW by 2047, India’s energy landscape is shifting rapidly. Solar power now leads the mix, backed by over 300 days of annual sunshine and technological advances.⁵ For investors, this creates compelling prospects in onshore solar and wind generation - aligned with both India's growth and global decarbonization goals.

Meanwhile, and as discussed in last month’s EM monthly, China has become the global powerhouse in electric vehicles (EVs), surpassing the US in sales and controlling over 75% of global lithium-ion battery production.⁶ Despite trade barriers, Chinese EV makers continue to expand abroad, while battery manufacturers in South Korea and Japan scale up in response to surging demand. With EV adoption accelerating across EMs like Vietnam and Singapore, and the sector still under-represented in credit indices, investors can find value through green bonds and corporate debt issued by automakers, battery suppliers, and AI firms supporting the transition.⁷

As over half the world’s GDP is exposed to nature-related risks,⁸ companies linked to natural capital - like sustainable pulp and paper producers - offer investors a way to integrate biodiversity considerations into portfolios. Biodiversity has gained significant investor focus over recent years, particularly in Latin America. Firms such as Brazil’s Klabin provide examples of how sustainability can be embedded in both operations and financing strategies.⁹ It is worth noting, however, that while biodiversity may be listed as a potential use of proceeds (UoP) in issuers’ ESG frameworks, in practice there are few green bonds whose UoP are exclusively and specifically allocated to biodiversity. Nevertheless, taken together, these trends underscore how EMs are becoming a key destination for long-term sustainable capital.

Achieving resilience and returns

For responsible investors seeking alternatives to DMs, or wanting to increase portfolio diversification, it is worth considering the West’s shifting political landscape. It is also worth noting that investing in more sustainable investments does not have to mean lower returns; JP Morgan’s ESG Emerging Market Corporate Index has delivered returns nearly identical to those of its broad non-ESG counterpart (Figure 3). Moreover, the ESG index has exhibited slightly lower tail risk in periods of heightened volatility, potentially as result of the quality bias inherent in ESG-focused investing.

Figure 3:  Index returns – lower tail risk from ESG index

Past performance is not a reliable indicator of current or future results.

Source: BofA Securities EM Corporate Credit Strategy as of 31st May 2025. Indices selected represent best proxy to highlight performance of EM corporate bonds and their ESG counterparts. Index performance is for illustrative purposes only. You cannot invest directly in the index. See index descriptions for further information on these indices. For illustrative purposes only.

EM look back – May

Fixed income

• The two main drivers in May were the unwinding of left-tail risks associated with reciprocal tariffs and concerns over the US sovereign losing its AAA credit rating.
• These developments led to outperformance in high-yield credit and underperformance in US duration, with US Treasury yields rising 24 basis points.

EM Credit

• The EM corporate universe slightly outperformed its sovereign counterpart, reflecting the longer-duration profile of the sovereign universe.
• High yield credit significantly outperformed investment grade, benefiting from the removal of reciprocal tariff tail risks and less sensitivity to government bond yields.
• Within EM, BB credit was the sweet spot as investors looked to add back risk, with a preference for high yield names with strong balance sheets.
• Confidence was further supported by constructive comments from the Mexican government regarding support for its state-run energy sector, as well as a strongly oversubscribed new issuance from Israel’s healthcare sector - both significant index constituents - which contributed to positive price action.
• Regionally, Asia outperformed, benefiting from favourable trade negotiations and the region’s dovish central banks, which continued to loosen monetary policy.
• At a sector level, autos stood out, supported by attractive valuations and the unwinding of worst-case tariff scenarios.
• In contrast, quasi-sovereigns underperformed, largely due to their greater sensitivity to government bond yields.
• Gross monthly supply reached US$39 billion, exceeding 2024’s monthly average. The Middle East accounted for 40% of the total - driven largely by a sizable deal from Saudi state-owned oil giant Aramco.

Risk: References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

Monetary policy

• Hungary’s central bank maintained its monetary policy at 6.5%, saying a “careful and patient” approach continues to be needed.
• The Czech National Bank reduced its base interest rate by 25bps to 3.5% - its fourth consecutive rate cut – while signalling easing is nearing its end.
• In South Africa, the South African Reserve Bank cut its key repo rate by 25bps to 7.25%, citing an improving inflation outlook, although noted ongoing uncertainty in the global economic landscape.
• Mexico's central bank cut interest rates by 50bps to 8.50% due to weaker economic activity and risks to growth from US tariffs.

Past performance is not a reliable indicator of current or future results.

Country-specific news

• Nationalist, Donald Trump-backed candidate Karol Nawrocki won Poland's presidential election, defeating centrist Rafal Trzaskowski, which could hinder the government's efforts to shift Poland back to the European Union mainstream.
• Turkey’s economy expanded 2% year-on-year in Q1, down from 3% in 4Q24, and below the 2.3% median. The result supports the argument to resume easing of borrowing costs, from the current rate of 46%.
• Fitch upgraded Argentina's long-term foreign currency debt rating to CCC+ from CCC, reflecting the launch of a new IMF programme and major liberalization of the FX market, which have strengthened external liquidity and the durability of President Milei's economic stabilization programme.
• Brazil's economy grew 1.4% in the Q1, driven by agricultural production, family consumption and investment.
• In Peru, Prime Minister Gustavo Adrianzén resigned, plunging the administration into another crisis, and creating ongoing difficulties for President Boluarte; this is the third time in 2 years she has had to appoint a new head of her Cabinet.
• Chile’s economy grew more than expected on the back of an increase in mining output, offsetting a drop in manufacturing and retail. Meanwhile, mining giant Codelco announced a partnership with Rio Tinto to develop a lithium project as governments seeks to increase output.
• A flurry of regional meetings occurred in Asia. US Trade Representative Jamieson Greer attended the APEC trade ministers’ meeting in South Korea and held a series of bilateral meetings on the sidelines as trade negotiations with the US continued. Xi Jinping hosted Latin American and Caribbean countries in Beijing, whilst Premier Li Qiang visited Indonesia before attending the ASEAN summit in Malaysia.
• China reduced its 125% tariff on US goods to 10%, whilst the US reduced its tariff from 145% to 30%, which included the additional 20% in relation to fentanyl.
• In China, the Caixin Manufacturing PMI, a measure indicative of SME activity, suffered a fall of over 2pts to 48.3, although official PMIs are around 50.
• India’s Q1 GDP growth came in stronger than expected at 7.4% (compared to consensus forecasts of 6.8%), while the country reported healthy PMIs of around 60.
• South Korea’s PMI for May was 47.7, an improvement from 47.5 in April but the fourth successive month in which the reading was in contractionary territory.

Market Data

Credit

Past performance is not a reliable indicator of current or future results.

Source: ICE data platform. as of 31st May 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

Yield to Worst

Source: ICE data platform. as of 31st May 2025. EMGB - ICE BofA Emerging Markets External Sovereign Index EMCB - ICE BofA Emerging Markets Corporate Plus Index,  EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index, EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index, Q690 - ICE BofA Custom Emerging Markets Short Duration Index, EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index, EMIA - ICE BofA High Grade Asia Emerging Markets Corporate Plus Index, EMHA - ICE BofA High Yield Asia Emerging Markets Corporate Plus Index , EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index, EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index, EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus, EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index, EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index, EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index,. Index performance is for illustrative purposes only. You cannot invest directly in the index. Indices selected provide best proxy for highlighting performance of emerging market corporate bonds. For illustrative purposes only. 

References

1. The Brady Plan, EMTA, Trade Association for the Emerging Markets.
2. S&P Global Ratings, as of 13th February 2024. “Sustainable bond issuance to approach US$1 trillion in 2024”
3. United Nations Climate Change, The Paris Agreement, What is the Paris Agreement?
4. The Paris Agreement requires Parties to disclose and maintain NDCs as strategic plans for achieving their carbon reduction coals in line with a net-zero trajectory. Further information is available online via the United Nations Climate Change website.
5. World Economic Forum, as of 30th November 2022.
6. The Washington Post, as of March 3rd 2025. “How China pulled ahead to become the world leader in electric vehicles.”
7. Bloomberg NEF, Southeast Asia EV Market Update: Adoption Picks Up, as of 12th June 2024.
8. PWC, as of 4th April 2023. Managing nature risks: From understanding to action.
9. Klabin, Sustainability report 2023.

 

All sources are Bloomberg unless otherwise stated.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of June 2025 and may change without notice.

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Index descriptions

EMGB - ICE BofA Emerging Markets External Sovereign Index tracks the performance of US dollar and euro denominated emerging markets sovereign debt publicly issued in the major domestic and eurobond markets.  Qualifying securities must have risk exposure to countries other than members of the FX-G10, all Western European countries and territories of the US and Western European countries.

EMCB - ICE BofA Emerging Markets Corporate Plus Index tracks the performance of the US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. Qualifying issuers must have risk exposure to countries other than members of the FX G10, all Western European countries, and territories of the US and Western European countries.

EMIB - ICE BofA High Grade Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated AAA through BBB3, inclusive.

EMHB - ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA ML Emerging Markets Corporate Plus Index (EMCB) including all securities rated BB1 or lower.

Q690 - ICE BofA Custom Emerging Markets Short Duration Index tracks the performance of short-term US dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.

EMRA - ICE BofA Asia Emerging Markets Corporate Plus Index is the subset of the ICE BofAML Emerging Markets Corporate Plus Index, which includes only securities issued by countries associated with the region of Asia, excluding Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.

EMHA – The ICE BofA High Yield Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BB1 and lower with a country of risk within the Asia region.

EMIA -  The ICE BofA High Grade Asia Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Asia region.

EMRL - ICE BofA Latin America Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Latin America.

EMIL - The ICE BofA High Grade Latin America Emerging Markets Corporate Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Latin America region.

EMHL - ICE BofA High Yield Latin America Emerging Markets Corporate Plus is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated sub-investment grade based on the average of Moody's, S&P and Fitch, and with a country of risk associated with the geographical region of Latin America.

EMRE - ICE BofA EMEA Emerging Markets Corporate Plus Index is a subset of The ICE BofA Emerging Markets Corporate Plus Index including all securities issued by countries associated with the geographical region of Europe, the Middle East and Africa including Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

EMIE - ICE BofA High Grade EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

EMHE - ICE BofA High Yield EMEA Emerging Markets Corporate Plus Index is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities rated BBB3 and higher with a country of risk within the Europe, Middle East and Africa regions.

The MSCI EM Index is a free-float weighted equity index that captures large and mid cap representation across emerging market countries. The index covers approximately 85% of the free float-adjusted market capitalisation in each country.

LDMP - ICE BofA Local Debt Markets Plus Index is designed to track the performance of emerging markets sovereign debt publicly issued and denominated in the issuer's own currency.

J0A0 - The ICE BofA ML US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.

C0A0 - The ICE BofA ML US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.

HE00 - The ICE BofA ML Euro High Yield Index tracks the performance of EUR dominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets.

ER00 – The ICE BofA ML Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets.

ICE BofA High Yield Emerging Markets Corporate Plus India Issuers Index (EINH) - is a subset of ICE BofA Emerging Markets Corporate Plus Index including all securities with India as the country of risk that are rated sub-investment grade based on average of Moody's, S&P and Fitch

ADOL -The ICE BofA Asian Dollar Index tracks the performance of U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

ADHY - ICE BofA Asian Dollar High Yield Index tracks the performance of sub-investment grade U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers.

ADIG -  ICE BofA Asian Dollar Investment Grade Index tracks the performance of investment grade U.S. dollar denominated sovereign, quasi-government, corporate, securitized and collateralized debt publicly issued in the U.S. domestic and eurobond markets by Asian issuers. Qualifying securities have a country of risk classified as an Emerging Markets country that is part of the Asia/Pacific Region.

CEMBI Broad Div. Index - The JP Morgan CEMBI Broad Diversified Index (CEMBIB Div) is a benchmark that tracks the performance of US dollar-denominated, fixed and floating-rate debt instruments issued by emerging market corporate entities.

JESG CEMBI Broad Div. Index - The JP Morgan ESG CEMBI Broad Diversified Custom Maturity Index tracks liquid, US Dollar denominated emerging market fixed and floating-rate debt instruments issued by corporates.

You cannot invest directly in an index, which also does not take into account trading commissions or costs. Additionally, indices do not include reinvestment of dividends, and the volatility of indices may be materially different over time.

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