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May 14, 2013
Emerging Markets to be Focus of Socially Responsible Investing 3.0
    by Robert Kropp

A new report argues that evolving climate finance mechanisms will be among the drivers to increase the practice of sustainable investment in emerging market nations.

Two reports issued late last year address the state of sustainable investment in emerging markets. A survey by EIRIS found that while investment in merging markets is increasing, investors remain concerned over the quality of sustainability reporting by companies. EIRIS also observed that with 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.

Also, the Emerging Markets Disclosure Project (EMDP) of US SIF: The Forum for Sustainable and Responsible Investment completed its four-year project with a report that concurs with several of the findings of EIRIS. "While many emerging market companies report some kind of ESG information, few use international standards such as the Global Reporting Initiative's guidelines," EMDP stated in its report. On the other hand, "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."

A new report, authored by Sonia Kowal of Zevin Asset Management and Jacob Park of Green Mountain College in Vermont, suggests that emerging markets might sell represent the next stage in the evolution of sustainable investment. Entitled Socially Responsible Investing 3.0: Understanding Finance and Environmental, Social, and Governance Issues in Emerging Markets, the report states, "We are about to enter what the authors call the third stage of socially responsible investing, in which SRI becomes a market reality, if not a force, in a number of emerging economies."

At present, however, "The lack of consistent ESG disclosure occurs with companies around the world, but the problem is especially stark in emerging markets, where it seems to delay socially responsible investing." How will sustainable investors address inadequate disclosure and invest their assets in what the report describes as markets offering "dramatic, if volatile, returns"?

One route emphasized by the authors is through sustainable stock exchanges. The Johannesburg Stock Exchange in South Africa mandates that companies issue integrated reports, in which ESG factors are included in financial reporting. The BOVESPA Exchange in Brazil recommends that its listed companies either state that they publish a regular sustainability report and where it can be accessed, or explain why they do not do so.

"The flurry of activity in many emerging markets reflects the need for the financial markets to internalize environmental and social considerations in order to promote more sustainable development," the report states. Some companies in emerging markets "achieved grades in environmental performance and systems that were on par with developed country environmental leaders."

Three significant trends are contributing to the advance of sustainability in emerging markets, the report found. In China, companies initiating IPOs must undergo an environmental assessment before obtaining refinancing. In the Middle East, Shari'ah-compliant investment "is now one of the fastest growing business segments in the world."

And the inevitability of addressing climate change means that "private sector financing will undoubtedly be needed to complement the existing national development assistance programs as well as international environmental financial mechanisms."

At present, international financial mechanisms are designed in such a way that a poor country like the Democratic Republic of Congo (DRC) has to compete with South Korea for available funding, because both are classified as non-industrialized countries by the United Nations Framework Convention on Climate Change.
"The tragedy of global climate finance, as currently designed, is that any country or region that wishes to tap the available financial flows to help with their respective climate risks needs to have a certain amount of institutional capacity to achieve funding success," the authors state in the report's conclusion.


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