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.
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."
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
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."
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
"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.