Several institutions, including the Institutional Investors Group on Climate Change (IIGCC), Pensions for Purpose and Principles for Responsible Investment (PRI), partnered with the World Benchmarking Alliance (WBA), urging asset managers to review and adjust their ESG investment strategies to ensure their approach to sustainability does not inadvertently lead to divestment from emerging markets.
Growing evidence suggests that ESG-related policies and sustainable investment strategies adopted by financial institutions may inadvertently discourage investment in emerging markets and developing economies (EMDEs), due to perceived higher ESG risks, according to the WBA.
Yet EMDEs are home to 85% of the global population, account for over half of global GDP and contain most of the world’s natural resources, the Alliance noted.
By 2050, six of the seven largest economies in the world are projected to be EMDEs. Significant capital is needed to support the sustainable transition in EMDEs, achieve the United Nations’ Sustainable Development Goals (SDGs), and drive economic development in these regions, it added.
To ensure sustainable investing helps, rather than hinders capital flowing into EMDEs for environmental and social purposes, a group of asset owners, asset managers and investor groups along with WBA have collectively developed some best practice guidance, including using regional-specific transition pathways and developing EMDE-specific engagement strategies.
This guidance aims to ensure that sustainability strategies align with the need to sustain and grow investments in these crucial regions, WBA said.
Bruna Bauer, research manager at Pensions for Purpose, said: “Investing in emerging markets presents challenges like governance issues and high carbon intensity, often resulting in investors shifting focus to developed markets.”
However, she said, incremental improvements and active engagement can enhance transparency and drive economic and social progress in emerging markets. “Investments in these markets can capitalise on opportunities such as demographic shifts and the energy transition funding gap.”
Bauer noted that by adopting strategic approaches and fostering transparency, investors can unlock significant impact potential, contributing to sustainable long-term growth, adding that emerging markets offer diverse opportunities for those willing to engage.
Andrea Webster, financial system transformation lead at WBA, said: “Financial institutions must ensure that their approaches to sustainability do not inadvertently penalise or lead to divestment from EMDEs. These nations need private capital to fund their transitions, meet the SDGs and for their economic development more generally. Sustainable investing should help, not hinder, capital flowing to EMDEs for these purposes.”
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