Back to the complete issue
Wednesday, 2 November 2022

ESG has a problem when it comes to EMs

Why are ESG investors turning their back on EMs? Worries about risk in emerging markets is leading ESG investors to shun them, according to the Financial Times. In theory, ESG investors should care about improving environmental and ethical standards in emerging-market business practices and production lines. But in practice, many have chosen simply to avoid the hassle of figuring out where standards lie and how to raise them, opting instead to reduce their exposure to EMs and cut out risk, the salmon-colored paper writes.

Emerging economies desperately need investment: The financing gap for developing countries to meet UN sustainable development goals is now estimated at USD 4.3 tn annually, An additional USD 2 tn per year is required to help EMs face climate change alone — and that’s excluding China, Nigel Topping, the UK’s climate change champion, tells the FT. “We know that 70 per cent plus of that needs to be private finance,” he said.

Some pension funds and sovereign wealth funds are taking an “active” investing approach — but not so much when it comes to EMs. Many big funds take the stance that it’s better to hold minority stakes in ESG non-compliant companies — oil and gas, for example — so that they can have a seat at the table and push these firms towards better practices. But that logic hasn’t extended to EMs, where fund managers cite fewer protections for minority stakeholders and more fragile institutions as barriers to this ‘impact investment’ approach.

Norway's sovereign wealth fund — the world's largest — last year added no new EM assets, citing a plan to apply uniform ethical and environmental standards to all its investments. “Some of the pension funds and sovereign wealth funds are really concerned to avoid headlines about exposures they have, whether to poor labor practices or government corruption,” said Stuart Theobald, co-founder of research consultancy Intellidex.

Lack of data is another barrier: Over half of investors polled by the FT said a lack of data was an obstacle to ESG investing in EMs, and all of them said they were not satisfied with corporate disclosure on EM ESG risk. EM companies can struggle to comply with differing local and international standards for social and environmental impact assessments, and universal standardization for ESG disclosures is still a long way away. Even where companies provide all the necessary data, wrong formatting, a lack of knowledge on how to approach ESG disclosures, or a mismatch in contextual considerations can mean they’re unfairly screened out on the basis of ESG criteria.

If the ‘good guys’ don’t invest, the other guys will: Where EMs can’t find ESG investors, stakes in their companies and projects could be snapped up by players who are more apathetic about sustainability. “What it does is shift companies from investors who have a concern about these issues to those who are largely indifferent to them,” Colin Mayer, professor at Oxford University’s Saïd Business School, tells the FT.

That could dangerously limit financing sources for some developing countries, says Alison Taylor, a specialist in ethical business at New York University’s Stern School of Business. “This is arguably worse than divestment out of oil and gas, because if you divest from a country, you leave it to organised crime, terrorist financing and violence,” she tells the FT.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

Enterprise is available without charge thanks to the generous support of HSBC Egypt (tax ID: 204-901-715), the leading corporate and retail lender in Egypt; EFG Hermes (tax ID: 200-178-385), the leading financial services corporation in frontier emerging markets; SODIC (tax ID: 212-168-002), a leading Egyptian real estate developer; SomaBay (tax ID: 204-903-300), our Red Sea holiday partner; Infinity (tax ID: 474-939-359), the ultimate way to power cities, industries, and homes directly from nature right here in Egypt; CIRA (tax ID: 200-069-608), the leading providers of K-12 and higher level education in Egypt; Orascom Construction (tax ID: 229-988-806), the leading construction and engineering company building infrastructure in Egypt and abroad; Moharram & Partners (tax ID: 616-112-459), the leading public policy and government affairs partner; Palm Hills Developments (tax ID: 432-737-014), a leading developer of commercial and residential properties; Mashreq (tax ID: 204-898-862), the MENA region’s leading homegrown personal and digital bank; and Industrial Development Group (IDG) (tax ID:266-965-253), the leading builder of industrial parks in Egypt.