Morgan Stanley's Sustainable Emerging Markets Fund: Seizing ESG-Driven Growth in India and Taiwan

The global shift toward sustainable investing has reshaped the landscape of emerging markets, with ESG-aligned strategies emerging as a critical differentiator. Nowhere is this clearer than in Morgan Stanley's Sustainable Emerging Markets Equity Fund, which has positioned itself at the forefront of this transition. With a strategic focus on tech-driven growth in India and Taiwan—two economies at the heart of the ESG revolution—the fund is primed to capitalize on resilient EM recovery in 2025. Here's why investors should pay close attention.

2024 Outperformance: A Strong Foundation for 2025

The fund's 2024 performance offers a compelling starting point. While it narrowly trailed the MSCI Emerging Markets Net Index by 0.21% in 2024 (7.29% vs. 7.50%), its 2023 outperformance—a 14.41% return versus the index's 9.83%—demonstrates its ability to seize opportunities in volatile markets. This resilience is no accident. The fund's sector allocations, particularly its overweight positions in Information Technology (24.78%) and Financials (25.61%), have been engineered to capture growth in high-potential, ESG-aligned industries.

Tech and Finance: The Engine of ESG-Driven Growth

The fund's emphasis on tech and financials isn't arbitrary. In Taiwan, companies like Taiwan Semiconductor Manufacturing (TSM)—a top holding at 9.85% of assets—drive the global semiconductor boom, a sector critical to renewable energy infrastructure, AI, and digital transformation. Meanwhile, in India, financial institutions are pioneering green financing and digital payment ecosystems, aligning with the country's push for sustainable development.

The fund's Consumer Discretionary overweight (17.59% vs. the index's 13.12%) further underscores its focus on resilient demand in emerging markets. Companies in this sector, such as Tencent (0700.HK), are leveraging digital platforms to meet rising consumer needs while integrating ESG principles into their operations.

ESG Engagement: Mitigating Risks, Amplifying Returns

Beyond sector bets, the fund's proactive ESG engagement sets it apart. In 2024, its teams focused on material issues like governance transparency, decarbonization, and supply chain compliance, particularly with the EU Deforestation Regulation (EUDR). For example, a decade-long engagement with a German software giant led to the inclusion of share-based compensation in earnings—a move that improves accountability and aligns executive incentives with shareholder value.

The fund's SFDR Article 8 classification ensures it adheres to stringent sustainability criteria, such as targeting a lower carbon footprint than its benchmark. This focus on responsible energy transition and circular economy themes not only mitigates regulatory risks but also positions the fund to benefit from long-term structural trends.

Why Act Now? The Case for EM Resilience

Emerging markets are at a pivotal juncture. While geopolitical risks and currency volatility persist, India and Taiwan are outperforming peers with strong fundamentals: India's tech exports hit record highs in 2024, while Taiwan's semiconductor industry accounts for 60% of global chip production. Both economies are also ESG pioneers—India aims for 500 GW of renewable energy by 2030, and Taiwan recently mandated ESG reporting for listed companies.

The fund's geographic allocation reflects this: 23.41% in India and 20.56% in Taiwan, versus the index's lower weightings (19.43% and 19.72%, respectively). This overweighting aligns with regions where ESG integration is accelerating—and where the fund's deep sector expertise delivers an edge.

The Bottom Line: A Timely Play on Sustainable Growth

The Morgan Stanley Sustainable Emerging Markets Equity Fund isn't just a bet on EM recovery—it's a strategic call to capitalize on the confluence of tech innovation, financial sector modernization, and ESG-driven policy shifts in Asia's growth engines. With a robust track record in volatile markets and a portfolio built to thrive in a carbon-constrained world, this fund offers a rare opportunity to profit from both sustainability trends and equity recovery.

Investors seeking exposure to EM's next wave of growth should act now. The fund's alignment with India and Taiwan's ESG trajectories—and its proven ability to navigate cycles—makes it a standout choice for portfolios seeking resilience and innovation.

This article is for informational purposes only. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.