Asset managers are being called to review their ESG investment approach to ensure it does not inadvertently lead to divestment from emerging markets.
The World Benchmarking Alliance (WBA) and participating asset owners have highlighted growing evidence that ESG-related policies and sustainable investment strategies could be unintentionally inhibiting investments from emerging markets and developing economies (EMDEs) due to the perception these have a higher level of risk relating to ESG issues.
WBA is working with asset owners, asset managers and other investor groups to address this and has released a call to action to ensure ESG-related policies and sustainable investment strategies are compatible with investing sustainably in EMDEs.
Andrea Webster, financial system transformation lead at WBA, commented: “Financial institutions must ensure their approaches to sustainability do not inadvertently penalise or lead to divestment from EMDEs. These nations need private capital to fund their transitions, meet the SDGs and for their economic development more generally. Sustainable investing should help, not hinder, capital flowing to EMDEs for these purposes.”
WBA said EMDEs are home to 85% of the global population and nearly 90% of people under 30. They currently account for over half of global GDP and contain most of the world’s natural resources. By 2050, six of the seven largest economies in the world are projected to be EMDEs.
As a result, significant amounts of capital are needed to fund the sustainable transition in EMDEs and the Just Transition to meet the UN Sustainable Development Goals, and for economic development in these regions more generally.
Asset managers, WBA added, have an important role to play in directing capital towards EMDEs.
The statement added: “WBA is working with asset managers to find innovative solutions to the issue of inadvertent divestment from EMDEs.”
In its next Financial System Benchmark, published in Q1 2025, WBA will be assessing asset managers on their processes for “avoiding divestment from low-income and lower-middle income countries as unintended consequences of its sustainability strategies and targets”.
Juliana Hansveden, portfolio manager at Ninety One, commented: “Active management has a unique role in facilitating the allocation of capital to support the shift to a more sustainable future. To fulfil this role, we look to invest sustainably through inclusive capital allocation, rather than divestment from emerging markets.”
Bruna Bauer, research manager at Pensions for Purpose, added: “Investing in EMs presents challenges like governance issues and high carbon intensity, often resulting in investors shifting focus to developed markets. However, incremental improvements and active engagement can enhance transparency and drive economic and social progress in EMs. Investments in these markets can capitalise on opportunities such as demographic shifts and the energy transition funding gap. By adopting strategic approaches and fostering transparency, investors can unlock significant impact potential, contributing to sustainable long-term growth. EMs offer diverse opportunities for those willing to engage. Pensions for Purpose is happy to support initiatives like the Investing Sustainably in Emerging Markets that promote the importance of sustainable investing in these regions.”
