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Perhaps due to a combination of the White House’s harsh rhetoric aimed at the Federal Reserve and its on again/off again tariff policy, many fixed income investors may be glossing over emerging markets bonds this year.
That’s too bad because the J.P. Morgan EMBI Global Core Index is up 4.06% year-to-date, easily outpacing the Bloomberg U.S. Aggregate Index (“the Agg”), an impressive feat when considering the Agg is up 2.88%. Emerging markets bonds aren’t alone when it comes to being ignored by some market participants in 2025.
The same is true of environmental, social and governance (ESG) and sustainability strategies, which is to say many a slew of asset allocators and investors are likely glossing over emerging markets debt featuring ESG/sustainability traits. They shouldn’t be because opportunity abounds with developing world green, social and sustainability (GSS) bonds.
For advisors looking for an easy way to articulate to clients what green bonds are, this is a form of debt issued by corporations and governments to fund climate-friendly projects. Green bonds are just one part of the EM bond “green” scenario.
EM Bonds, Sustainable Investing Ideal Union
As advisors know, emerging markets bonds compensate investors for added risk in the form of higher yields, making the asset class a pertinent consideration in tactical sleeves of broader fixed income portfolios. Likewise, developing economies are being pressed to join the West in prioritizing sustainability and the fight against climate change. Some of the larger ones are responding, potentially boosting the appeal of the green/emerging markets debt marriage.
“With appealing valuations compared with other fixed income sectors, emerging markets offer the potential for generating attractive income and total return,” notes Goldman Sachs Asset Management (GSAM). “Investing also has the potential to make an impact in countries that are among the most vulnerable to the combined impacts of climate change and widening economic inequality, and where the financing shortfall for sustainable development stands at $4 trillion a year.”
Unbeknownst to many investors is the fact that in 2024, emerging markets issuers sold $1 trillion worth of GSS debt, confirming there was steady demand for those bonds. Those bonds, issued across a variety of currencies, are funding an array of climate, water and sustainable projects. Important to advisors is the point that fundamentals, particularly among corporates, for EM GSS debt are more sturdy than some expect.
“We think this reflects improvement in fundamentals, also evidenced in key credit metrics. Net leverage has remained at cycle lows, for example, demonstrating financial discipline,” adds GSAM. “Profit margins have increased, driven by sales growth and easing cost pressures, which has boosted the financial standing of EM companies. “
Speaking of EM Green Debt Fundamentals…
As noted above, some investors are apt to be surprised by the quality of EM GSS bonds, but that’s not a bombastic assertion. It’s reality.
Chart Courtesy: Goldman Sachs Asset Management
Something advisors should note is that active management could have advantages when it comes to accessing EM GSS bonds.
“Identifying opportunities for potential returns and real impact in this diverse market requires an active approach underpinned by robust credit, green and social underwriting,” concludes GSAM. “The rise of active ETFs provides investors with a flexible way to gain exposure to EM GSS bonds, combining the potential advantages of active management with the benefits of the ETF wrapper.”
Related: Global Fixed Income: The Smart Move for U.S. Investors Right Now?