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October 16, 2012
Project Promoting ESG Disclosure in Emerging Markets Issues Final Report
    by Robert Kropp

The Emerging Markets Disclosure Project notes that considerable improvements in ESG reporting have been driven by regulatory regimes such as sustainable stock exchanges, but calls for reliance upon standardized reporting to increase attractiveness of emerging markets for investors.


Last week, SocialFunds.com reported on a new survey of emerging markets investment by EIRIS, which found both increased investor confidence and persistent concerns over the quality of corporate attention to environmental, social, and corporate governance (ESG) issues.

In its report, EIRIS makes reference to the Emerging Markets Disclosure Project (EMDP) of US SIF: The Forum for Sustainable and Responsible Investment, with which it collaborated on a previous survey in 2009.

EMDP announced this week the publication of its own report on the progress made in encouraging improved ESG reporting by companies during the four years of the project's existence. The report's conclusions concur with those of EIRIS, both determining that considerable improvements have been made in at least some emerging markets; in both reports, Brazil and South Africa have taken leading roles, in large part due to sustainable stock exchanges that require listed companies to issue sustainability reports.

On the other hand, EMDP also concurs with EIRIS in finding many instances of poor corporate sustainability reporting. "While many emerging market companies report some kind of ESG information, few use international standards such as the Global Reporting Initiative's guidelines, issue comparable, year-on-year metrics, or offer in-depth, useful information on sustainability risks such as climate change, water use and human rights," EMDP observed.

Even though problems in corporate reporting persist, however, awareness of the issue has grown since EMDP was launched in 2008. "When the project started," the report observes, "Global providers of ESG data largely did not offer information about companies listed in emerging markets, and research organizations generally did not have the capacity to deliver these types of services to investors, at least not on a global scale that offered comparability between markets."

EMDP teams in four countries—Brazil, Indonesia, South Africa, and South Korea—collaborated with local partners and engaged with companies to improve their understanding of the importance of sustainability reporting. "Companies responded positively to suggestions from EMDP participants once they had a better understanding of how sustainability information could drive corporate performance and attract investors," the report found. Companies initially resistant to engaging on sustainability measures were much more likely to do so when notified that industry peers were reporting on them.

The listing and regulatory requirements established in Brazil and South Africa were the most important drivers of sustainability reporting, the report found, highlighting the necessity of developing such standards on national levels. Yes the lack of national reporting standards is hardly limited to countries in emerging markets; developed nations would do well to take their cue from Brazil and South Africa as well.

Another area in which companies in both developed and developing countries could seek to improve is in the involvement of management in sustainability measures. "As in developed markets," the report stated, "Investor relations departments and senior management at times appeared detached from internal sustainability efforts and need to be brought into the process to yield meaningful, long-term results."

In its report, EIRIS observes that with the persistent low returns and volatility prevailing in developed markets since the financial crisis, the growth of emerging markets makes them an increasingly attractive investment strategy. Respondents to the EIRIS survey do in fact report significantly increased assets under management, a healthy fraction of which is earmarked for emerging markets.

While EMDP did not report on assets devoted to emerging markets in its report, Lisa Woll, CEO of US SIF, said, "As our members' product offerings continue to expand into emerging markets, the reporting improvements promoted by the EMDP are critical. The significant progress made by the project in persuading emerging market companies to report according to internationally recognized standards, including the Global Reporting Initiative (GRI), will likely have ripple effects for many years to come."

 

 
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