In addition, many emerging countries lack the infrastructure to meet the obligation to provide comprehensive ESG reporting. As a result, companies from these countries are often excluded even though they exert a positive influence on society and the environment.
The problem is that ESG standards, primarily designed for developed markets, put local industries in emerging countries under pressure. If standards for the environment and safety at work are important, there are many companies in these countries that cannot respect them without aid and capital from abroad. The case of the textile industry in Bangladesh illustrates the situation well. The strict ESG provisions discourage investors without eliminating the risks for local workers.
Opaque market
According to the Financial Times, A growing number of researchers fear that ESG investors’ concern for employee rights and other social issues will lead them to abandon poorer countries, where protection in these areas is poor.
But it is difficult to find figures on this subject. Timo Busch, professor at the Faculty of Economics and Social Sciences in Hamburg, does not know any. And reliable studies are lacking. In his eyes, the figures fall into the realm of speculation. “If you focus on ESG filters to identify the good students, you will mainly come across large Western firms,” notes the economist. It is therefore generally easier for investors to find comprehensive data on sustainable development in developed countries than in poor countries.
If you focus on ESG filters to identify good students, you will mainly come across large Western firms.
Should we conclude from this that rich countries have better ESG scores and that the criteria in this area are easier to meet? Distinctions must be made between country and company rating systems. According to Sabine Döbeli, director of the professional association Swiss Sustainable Finance, national ratings are based on numerous indicators depending on the standard of living but also on others relating to good governance. “Under these conditions, it is logical that developing countries fare less well.”
As Sabine Döbeli explains, firms from emerging countries are indeed ranked less well according to ESG criteria, and this is due to different factors. These companies operate in countries where regulations are generally less severe. They therefore have less ambitious ESG strategies. “From this point of view, the ratings are not unfair, they only reflect a lower level of ESG practices,” deduces the SSF expert. But when investors are interested in emerging countries, they take this fact into account and place the reference value lower, or compare companies with their counterparts in countries with a similar economic position.
Risk-return ratio, a key indicator
The director of the Swiss association for sustainable finances is therefore not talking about unequal treatment but much more about “thinking about risk”. It is important not to put all investment products that invest in emerging countries in the same basket. “It is up to each investor to carefully examine the risk-return ratio and decide on this basis.”
For Sabine Döbeli, efforts are being made to better show that there are also attractive investments in emerging countries, the risk of which is no greater than in the corresponding investment categories in industrialized countries.
Will it ultimately be necessary to introduce new differentiated ESG criteria, taking greater account of the context of developing countries? Rachel Whittaker, head of sustainable investments at financial services provider Robeco, notes that the sustainability sector is already moving towards more differentiated and targeted ESG criteria, both for different regions of the world and for the consideration of areas specific such as climate, biological diversity or even social issues. The International Finance Corporation (IFC) and the UN have recently committed to greater involvement of emerging countries in the definition of ESG rules. “These initiatives aim to establish a more balanced and fairer approach to sustainable investing,” says Rachel Whittaker.
Focus on emerging countries
The emphasis placed on certain regions in the developments of ESG analyzes and its effects could contribute to ensuring that investments in developing countries are not only sustainable but “also integrative and that they take more directly into account social and local economies,” explains Rachel Whittaker.
If the world population reaches 10 billion human beings by 2050, this will mainly be due to the demographics of emerging countries, estimates the specialist. “Therefore, for sustainable investments, it makes sense to focus on emerging countries. Because that’s where the main effects will be felt.”
Sustainable development specialist attached to the Zurich branch of Robeco, Swiss and British citizen, Rachel Whittaker insists on the observation that the conditions for such development, like the UN objectives in this area, are explicitly oriented towards a reduction in inequalities between countries.
In search of generally recognized criteria
In 2015, the global community approved the 2030 Agenda and committed to a total of 17 global sustainability goals (Sustainable Development Goals, or SDGs) from social, economic and ecological perspectives. These SDGs must form the basis for promoting sustainable and inclusive growth for all parties. “In recent years, many strategies and financial instruments have been developed to achieve these goals, which creates interesting opportunities for investors.”
According to Rachel Whittaker, the major challenge for sustainable investments is that there are currently still no generally recognized ESG criteria – even though regulatory authorities, particularly in Europe, are trying to standardize and clarify these issues. “This makes it difficult for investors to assess which companies truly respect these values and the activities that result from them,” she notes.
Therefore, it is up to investors themselves to fulfill the duty of care if they want to invest their money while respecting the principles of sustainable development. “We must apply the same discipline to sustainable or ESG investments as to traditional investments.”
