The global financial industry has adopted ESG factors as part of the standard investment decision process. Emerging markets are following this trend at a different pace. However, data disclosure and availability are still proving challenging.
- The lack of data and consistency in emerging markets is the main barrier to faster sustainable finance adoption. While we have noticed a significant improvement in data availability, there is still some work to do.
- Data is the bridge that connects ESG investments with emerging economies and it is the key driver in achieving Sustainable Development Goals.
- While adopting global standards can be considered a big step forward, ESG should be valued in the local context. It is important to consider “what good performance looks like in emerging markets”.
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The opportunity for emerging markets
The global financial industry has adopted ESG factors as part of the usual investment decision process. According to the latest edition of the FTSE Russell global survey, sustainable investment is now mainstream across the globe, as 86 percent of asset owners are implementing sustainability into their portfolios.
In parallel, there has been increasing collaboration between key stakeholders towards attaining a comprehensive global baseline for sustainability disclosure standards. This was evidenced by the creation of the International Sustainability Standards Board (ISSB) a year ago.
Emerging markets are following this trend at a different pace, but progress is a fact in almost all countries.
A recent report published by PRI highlights the drivers to investment in emerging markets. Institutional Investors choose to invest in emerging markets for several reasons, including to gain exposure to growing economies, portfolio diversification and to have a positive impact on the country’s development.
This represents an incredible opportunity for many countries to attract capital and accelerate growth, as well as to support the transition to a low-carbon economy.
The benefits of companies implementing a sustainable strategy are recognised globally. From identifying new opportunities for revenue generation to enhancing reputation, reducing operational and financial risks, and accessing lower cost of capital.
An important factor should be considered when we talk about developing economies: ESG disclosure helps to dissipate the noise of short-term shocks and to better demonstrate the long-term potential.
The challenge of data availability
Data is, in essence, the bridge that connects ESG investments with emerging economies and it is the driver to progress towards Sustainable Development Goals achievement.
The efforts of regulators and Stock Exchanges in stabilising frameworks and providing guidelines for better corporate disclosure are paying off.
In many countries like Malaysia, Thailand, Philippines, South Africa, Morocco, United Arab Emirates, India and China, we have noticed a significant improvement in data availability.
However, there is still some work to do.
The lack of data and consistency in emerging markets could be identified as the main barrier to faster sustainable finance adoption and fund inflows. Together with a robust and comprehensive database to build on, indexes and analytics support and inform investment decision-making.
How do we accelerate the content creation process?
Collaboration and deeper engagement between the financial community participants is key. A good example of this in practice is the BIST Sustainability Index, where advanced technology and global best practices allow a faster and more accurate company sustainability assessment. Therefore, market information is more relevant.
This index, which will be followed by others, intends to facilitate investing in sustainability for Borsa Ístanbul investors.
Listed companies in Turkey are invited to update their sustainability data through the ESG Contribution tool, a free, self-service workflow platform, that allows companies to make their ESG impact known globally.
Moreover, this is a communication channel between companies and the Refinitiv research team as well as the content experts. This makes the reporting task easier, as companies can find a guide on material data points that are relevant for investors. At the same time, this ensures data users have access to the timeliest, verified, and comparable data on individual companies.
While adopting global standards can be considered a big step forward, ESG should be valued in the local context. Current taxonomies are a benchmark that emerging markets can build on.
During the sixth edition of the Future Investment Initiative (FII) Conference that took place in Saudi Arabia last October, participants had the opportunity to deep dive into this idea. The FII Institute invites investors to integrate the Inclusive ESG Framework and Scoring Methodology into their decision-making.
The assessment tool, which is the outcome of several interviews with leading investors by EY, addresses the question of “what good performance looks like in emerging markets”.
Having a more holistic approach that considers challenges on social and governance factors, as well as country risks and opportunities, contributes to a virtuous circle where the visions and commitments at the national level have a positive influence on the sustainable strategies defined by companies. This ultimately also attracts more international and local investment.