Emerging markets (EMs) have reclaimed the spotlight in 2025–26, offering both excitement and complexity for investors. Navigating volatility effectively can unlock long–term, sustainability-aligned returns for investors while addressing critical development needs across the globe.

This article explores three interconnected pillars: current EM dynamics and volatility drivers, the state of sustainable and impact investing in EMs, and the concrete tools and strategies to turn market swings into enduring, responsible gains.

Macro & Market Backdrop: Why EMs Are Back in Focus

EM benchmarks have outperformed their developed market peers in recent quarters. The MSCI Emerging Markets IMI Index rose approximately 12.7% in Q2 2025, compared with an 11.5% gain for the MSCI World and 10.9% for the S&P 500. Over the first half of 2025, EM equities delivered a 15.6% total return (USD), far surpassing the S&P 500’s 6.2%.

This resurgence is underpinned by several macro tailwinds:

• weakening U.S. dollar and fading U.S. exceptionalism boosting EM currencies and capital flows.
• Policy cycles turning in major EMs, with easing in India and nearing the end of tightening in Brazil.
• renewed investor interest in undervalued EM regions after a decade of DM outperformance.

Short-term volatility persisted through tariff shocks, rate uncertainty in the U.S., and geopolitical tensions. In April 2025, a sudden “Liberation Day tariff storm” spiked global risk aversion, briefly suppressing rate-cut expectations. Despite these episodes, EM volatility has remained relatively stable compared with U.S. and European markets, rebounding swiftly as risk appetite returned.

Country & Regional Case Studies: Volatility in Practice

Different EM regions illustrate how volatility can create opportunity.

Brazil experienced a rate-cycle whiplash in late 2024, triggering equity sell-offs when inflation forced the central bank to reverse rate cuts. By Q2 2025, valuations hit multi-year lows, but a 13.3% gain in Q2 lifted year-to-date returns to approximately 30%. With inflation easing and a likely end to tightening, markets anticipate rate cuts by late 2025 or early 2026.

UAE and Dubai have demonstrated resilience despite elevated geopolitical risks. Reform-driven diversification, robust sovereign finances, and a business-friendly environment have solidified their status as stable capital hubs, attracting investment even amid global uncertainty.

In China and India, early signs of stabilization and policy easing, respectively, have attracted sustainable-investment-oriented managers. Opportunities span industrial upgrading, clean energy, digitalization, and infrastructure, underpinned by demographic tailwinds and urbanization trends.

Structural Volatility Drivers in EMs

Understanding the sources of price swings is essential to navigating them:

• Macroeconomic risk: sensitivity to capital flows, commodity cycles, and dollar strength.
• Political and policy risk: elections, populist shifts, and regulatory changes can trigger sharp repricings.
• Currency risk: FX moves often dominate local-currency equity performance for foreign investors.
• Liquidity and market structure: thinner markets and limited coverage can exacerbate price movements.
• Climate and physical risk: higher exposure to environmental shocks and transition risk in fossil-fuel–dependent economies.

Why Volatility Can Be a Source of Sustainable Returns

Asset managers often view volatility as a buying opportunity. After the April 2025 tariff-related sell-off, EM equities rallied 18.4% from the low on April 9. Historical data shows that EM drawdowns can be sharper but shorter than in developed markets, with rebounds often outpacing peers when fundamentals remain sound.

The key messages for investors include:

• valuation dislocations in quality names create entry points during corrections.
• diversification and factor exposure in EMs helps hedge DM concentration risks.
• Investors with 5–10-year horizons can capture an illiquidity and risk premium.

The Sustainable Investing Imperative in EMs

Emerging markets face an annual financing gap exceeding $4 trillion to meet the UN Sustainable Development Goals and climate objectives. IFC estimates that EMs need an additional $4 trillion annually above current spending to close critical infrastructure and development shortfalls.

Regulatory progress is accelerating. Since 2023, Sustainable Banking and Finance Network members have adopted 145 new sustainable finance frameworks, aligning policies with international best practices. Nearly half of member countries have introduced measures to expand SME finance, fostering inclusive growth.

The World Benchmarking Alliance urges global asset managers to refine ESG tools rather than exclude EMs, arguing that global decarbonization and social goals cannot be achieved without EM capital flows.

Sustainable & Impact Instruments and Strategies in EMs

Investors can harness a growing toolkit of sustainable instruments to align returns with development outcomes:

• GSS bonds (green, social, sustainability bonds) offer transparency on use of proceeds and annual impact reporting and structured engagement.
• Blended finance vehicles that combine concessional capital with market-rate funding to de-risk early-stage projects.
• Impact equity funds targeting sectors like renewable energy, agriculture, and healthcare in under-served regions.

Risk controls are equally vital. Successful strategies employ dynamic asset allocation, currency hedges, and factor tilts to manage drawdowns. Engagement and stewardship efforts can enhance issuer governance and environmental performance, contributing to both risk mitigation and value creation.

In a landscape defined by rapid change, volatility need not be a deterrent. By combining rigorous analysis, a long-term perspective, and a commitment to sustainability, investors can turn EM market swings into engines of positive impact and robust returns for years to come.