Making ESG fit for emerging markets

Leaders are intent on rolling out environmental, social and governance-related initiatives, with national policy emulating high-level frameworks such as the UN Sustainable Development Goals and the Paris Agreement. 

However, the question of whether sustainability-linked initiatives, policy and investment can meet the needs of developing economies in business and beyond remains a topic of debate. 

This concern was clearly illustrated a few years ago when Siti Nurbaya Bakar, the Environment Minister for Indonesia, said that the zero-deforestation pledge at climate conference Cop26 was “unfair” on developing nations. They added that the pledge must not halt socio-economic development in Indonesia. 

Indeed, large-scale infrastructure projects can be positive socio-economically for emerging economies as they involve investment in public services, as well as local job creation. The East African Crude Oil Pipeline Project, “EACOP”, has been the subject of multiple protests, with campaigners claiming extracting crude oil is no longer necessary. “Contrary to what proponents argue, the EACOP will not ‘unlock East Africa’s potential’”, states Greenpeace. 

While controversy remains over some of these projects, researchers project soaring ESG investment in the next few years. According to PwC, institutional ESG investment is estimated to rise by 84% to US$33.9 trillion in 2026 (from 2021), and making up 21.5% of assets under management. 

Most of the activity in sustainable finance has, thus far, been concentrated in advanced economies, with Europe at the centre of this movement. The question now is, can this momentum translate for developing countries for them to have a slice of the ESG pie? 

Flowing into ESG

Under PwC’s base-case growth scenario, ESG-oriented assets under management in the US would more than double from US$4.5tn in 2021 to US$10.5tn in 2026, and in Europe it would increase by 53% to US$19.6tn.

Investors in other regions outside the US and Europe are also growing their allocations. Asia-Pacific has the fastest percentage growth in ESG assets under management, with this expected to more than triple, reaching $3.3tn in 2026. 

ESG products in Africa and the Middle East are gaining some market share, as well as in Latin America, where ESG products account for $25bn. 

More positively, according to the International Monetary Fund (IMF), ESG investments now make up almost 18% of foreign financing for emerging markets – excluding China – quadruple the average for recent years. 

Additionally, the IMF points to the ESG ecosystem in emerging markets not only growing in size but also broadening across other dimensions. “Green bonds remain a core part of this ecosystem, with volumes growing at an average rate of 20% [per annum]. However, social and other sustainability-linked instruments are becoming more important, reaching almost half of total issuance in 2019-21,” reads a blog. 

Policy and data infrastructure

In our view there are two broad ways that can support increasing ESG investment and sustainability in emerging markets. 

The first revolves around policy. Policymakers should strengthen education around ESG to incentivise efficient pricing of such risks and avoid greenwashing, the use of green labels or strategies that are often unverified or even, at times, deceptive. 

Policies should be focused on improving the quality, consistency, and comparability of ESG data, develop classifications that align investments with higher-level goals, and enhance global disclosure standards. 

The second is improving data infrastructure and integrating intelligent tools. Emerging economies face challenges in the availability and quality of ESG-related data when it comes to the green and clean economy transition. 

To avoid fragmentation of markets and regulatory approaches, international coordination and the adoption of global data standards across business is an imperative. 

National, regional and global action are needed to improve data infrastructure in developing countries if they are to have significant ESG investment and the benefits that brings. Intelligent tools will be necessary to collect and collate data independently, under strong data frameworks, for real progress to be made across the business ecosystem.

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