Sustainable investment, or what is currently known better as ESG investing has first started in the 1960s as a way to provide incentives for companies with more socially responsible business activities. Investors are no longer focusing solely on the economic performance of the business, but instead on its environmental, social, and governmental (ESG) aspects. In the modern era, the ESG movement has allowed investors to be more aware of those who were impacted by their funds. It also provides investors with more information regarding the businesses’ impacts on its stakeholders, apart from the shareholders. Firms with better ESG ratings have repeatedly shown better performance compared to those with low scores, especially in erratic periods.

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With immense interest from the global investors, in 2020 alone, the ESG funds have reached a whooping USD 1.7 trillion worldwide, while the total ESG assets value in Eurozone was already close to USD208 billion. The number is predicted to reach USD 53 trillion by 2025, however, it heavily relies on how well ESG frameworks can perform in emerging markets and developing countries. As mentioned by the Paris Agreement and the Sustainable Development Goals (SDG), this number is only possible if both developed and emerging market stakeholders can work together for the betterment of ESG ratings, especially in the global south where the lack of financial support is still highly relevant.

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Some criticize the European Financial Reporting Advisory Group which works on EU sustainability reporting standards, to have ignored the global needs, as these standards are barely suitable for most of the emerging markets. They argue that the ESG rating system that we have now is rather antiquated with criteria that are not applicable in countries with emerging economies. The ratings have favored bigger companies who already have the funds to maintain the sustainability of their activities while rejecting those who are in terrible need of them. Currently, roughly 60% of developing countries are receiving low sovereign credits rating, simply because the current ESG factors are not aligned with how the financial activities operate in their country. Investors view these emerging markets as high risks investments as it would take longer lead times and costly processes to bring back profits. Francesco Bicciato, the Forum of Sustainable Finance secretary-general, also adds that ‘emerging countries are often seen mainly as investment objects as they have high-risk high return opportunities with high geopolitical risks.’

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The current global ESG scoring put emphasis only on the end result performance while often ignoring the efforts taken to reach the goals, giving no positive value to the progress towards betterment. At the same time, countries with emerging economies are more complex and diverse, with huge cultural aspects and varying local laws. They often experience difficulties to develop more advanced and sustainable technologies like those in high-power economies, further disqualifying them from the ESG funds they terribly need. Yet, these markets are often proven to be economically efficient even though they are not able to follow such ESG standards.

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Other difficulties are expected to arise due to the fact that these major rating agencies are located in countries with developed markets, blinding them from the varying cultural and geographical aspects that are often highly interrelated with economical conditions in emerging markets. Often, these emerging markets are also the main producer of raw materials needed for production in developed countries, in a way taking responsibility for the outsourced pollution of the supply chain.

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It is undeniable that there is a pressing need for inclusivity in regard to the ESG ratings in emerging markets. Experts have mentioned their concern about the importance of ESG in the global south countries and they believe that ESG engagement in Asia can be seen as both a challenge and an opportunity. As these countries are still in need of the institutional framework that could ensure that these companies are operating towards a more sustainable future, it’s good news that investors are now rewarding responsible corporate behavior, especially for countries with limited resources.