The discussion challenged misconceptions about elevated risk, highlighting diversification benefits and comparable performance to developed markets(DMs). Panellists emphasised the need to reframe EMs as “growth markets”, address systemic sustainability risks and increase private capital flows. Collaboration, better data and policy support were seen as key to unlocking EM allocations and advancing global resilience.
Laasya Shekaran, Director, Pensions for Purpose, invited speakers from British International Investment (BII), Church of England Pensions Board, Institutional Investors Group on Climate Change (IIGCC) and Ninety One to discuss strategies for unlocking EM allocations, aligning investments with sustainability goals, and overcoming perceived and structural barriers to impactful, long-term portfolio growth.
Diversity and definition of EMs
The session began by exploring how EMs are defined and the diversity within this category. There is no single global standard: definitions vary by income levels, market liquidity, openness to foreign investmentand regulatory frameworks. Boundaries between EMs and DMs are increasingly blurred, with some EM traits appearing in developed economies. Participants emphasised that EMs are not a single asset class, but a collection of sub-markets with distinct risk-return profiles, and current benchmarks often underrepresent key sectors due to size and liquidity biases.
Strategic value: systemic risk, diversification and stewardship
EM allocations were highlighted as a strategic tool to manage global systemic risks, such as climate change and nature loss, which disproportionately affect EMs. They provide portfolio diversification, behaving differently from developed marketsand offer hedging against volatility. Active investment is necessary for asset owners to influence policy and sustainability practices, and engage meaningfully with investee companies. Responsible investment considerations, such as environmental, social and governance (ESG) and ethical mandates, can limit the investable universe, but also offer pathways to positive impact.
Private capital and collaboration
Private capital, particularly from pension funds and insurers, plays a critical role in meeting funding gaps for sustainable development and climate transition. With official development aid declining, collaboration with development finance institutions (DFIs) and blended finance structures is essential. Concessional capital and riskmitigation tools enable pension schemes to access EM opportunities while fulfilling fiduciary duties. Local expertise and partnerships with regional funders are crucial to navigate complex markets and maximise impact.
Misconceptions, risk perception and opportunities
The discussion addressed widespread misconceptions about EM risk, particularly in private credit. Data shows that annual loss rates are comparable or better than in DMs, while yield premiums reflect capital scarcity and less competitive markets. EM corporates are increasingly integrated globally, providing material diversification benefits. Investment opportunities were highlighted across climate solutions, clean energy, nature-based solutions, circular economy, agritech, smart tech and resilience-focused companies. Successful allocation requires local knowledge, collaborationand careful risk management.
Challenges: regulation, educationand ESG constraints
Barriers to EM investment include regulatory caution, geopolitical and domestic policy priorities,and historical risk models that may not reflect current data. Operational challenges for asset owners include limited in-house expertise, reliance on asset managers and uneven engagement with DFIs or multilateral development banks. ESG and ethical screening can unintentionally reduce the investable universe, particularly in EMs with differing standards. Education, effective communication, peer learning, emerging impact measurement toolsand supportive policy frameworks are essential to overcome these barriers and unlock sustainable, long-term EM allocations.
Breakout groups:
Group 1
How can we help UK pension schemes consider EM alongside UK allocations, when there are limited bandwidth and resource?
Regulatory gap: there is a clear tension between regulators’ cautious perception of EMs and the actual investment opportunities. Bridging this gap is crucial to help UK pension schemes confidently consider EM alongside traditional UK allocations, despite limited bandwidth.
Data availability: valuable data on EM risks and opportunities exists, but is often underutilised or withheld. Unlocking and sharing this information could give pension schemes deeper insights, enabling them to make informed allocation decisions and overcome the traditional reliance on capital markets assumptions.
Group 2
How can we improve the way we educate and communicate with pension schemes around EM risk and opportunities?
Impact of scheme size: smaller pension schemes typically rely heavily on investment consultants, while larger schemes have the resources to build in-house expertise. Understanding how size shapes capability and decision-making is key to designing effective education and communication strategies for EM investments.
Client demand and messaging: low client demand for EMs, combined with fragmented or self-interested messaging from asset managers, can confuse pension schemes. Clear, consistentand tailored communication is needed to help asset owners understand the benefits and risks of EM allocations.
Group 3
How does the geopolitical environment shape our approach to EMs?
Policy and stability: political and policy stability, including tax incentives and regulatory frameworks, significantly affects the attractiveness of EM investments. Investors require supportive environments to manage risks such as currency volatility, hedging costs and long-term cashflow matching.
Investment opportunities: despite geopolitical risks, EMs still offer attractive investment opportunities, particularly in infrastructure and climate mitigation. Clear revenue models, scalabilityand supportive policies make these sectors promising for pension schemes looking to diversify and achieve impact objectives.
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