Published: 26/07/2024
Despite emitting fewer greenhouse gases per capita than many developed markets, low and middle-income nations are suffering some of the most devastating consequences of global warming - from raging wildfires in Indonesia to deadly typhoons in the Philippines, nations have been hard hit by adverse climate events. Given the interconnectedness of supply chains, extreme weather conditions in one country can lead to a ripple effect across the world. S&P Global Ratings predict that, if left unchanged, climate effects could lower GDP by 6% in Africa and the Middle East, 7% in Central Asia and 15% in South Asia by 2050.
One of the major barriers to addressing climate change and sustainability goals is the lack of financing. The Organisation for Economic Cooperation and Development (OECD) estimates that there is a US$3.7 trillion funding gap in annual financing needed to meet these goals. Countries like Nigeria and Sierra Leone are developing green growth plans and launching investment packages focused on renewables and climate-resilient infrastructure; and Barbados has just introduced its own 2035 investment plan to achieve prosperity and resilience. But these efforts all require financing. While private capital flows from investors can play a role in closing this gap, some of the most cited risks centre around political or social instability, poor governance and corruption.
The lack of meaningful ESG disclosures has also hindered responsible investment flows to emerging markets. However, there is growing momentum by governments and regulators taking proactive steps to enforcing mandatory ESG reporting. Within the Southeast Asia region, of the 600 top companies, only 420 companies have adopted sustainability reporting (according to Global Reporting Initiative ASEAN). India has now made this mandatory for the top 1,000 listed companies. In May 2024, China released a draft ESG disclosure guideline which will be mandated for all listed companies on its three mainland stock exchanges as well as for companies cross-listed on the Hong Kong Stock Exchange.
ESG ratings represents another significant barrier as companies in emerging markets often score lower than their developed market counterparts. The one-size-fits-all methodology fails to consider each country’s nuances, complicated by the competing priorities between environmental, social, governance factors. For example, in Latin America, many economies and companies depend on ‘dirty’ industries such as mining, oil and gas, and cement. While investor support for decarbonisation efforts is hugely important, more consideration must be given to the jobs and broader socio-economic development that those industries support. Failing to do so risks further exacerbating the already high levels of poverty in the region which could subsequently drive greater levels of inequality, political instability and unrest. The shift from fossil fuels to renewable energy calls for a new business model and new entrants willing to adapt to both environmental and societal concerns, and these need to be supported.
At EIS, we believe ESG ratings cannot be viewed in isolation. We have been cognisant of the ESG risks and are encouraged by the growing adoption of reporting disclosures as well as the opportunity set presented by emerging market investments (both impact and financial returns). We continue to review investment options and seek to work with fund managers who not only have demonstrated experience but also possess local ESG and impact knowledge and are already active stewards in engaging on the transition pathway.