This report delves into the complexities of environmental, social, and governance (ESG) investing in emerging markets and highlights some of the key challenges for sustainable investing. The lack of standardisation in ESG regulation and data presents a significant hurdle. Investors in emerging markets (EM) are faced with different standards and a lack of sufficient data due to the absence of clear frameworks. Despite these challenges, ESG is increasingly becoming a crucial factor in EM investments. The report cites that ESG investing sits at the core of EM investing and is a crucial part of credit managers’ long-term risk assessment. The report highlights that the primary challenge is to standardise the data and regulation. Therefore, harmonising data standards would encourage more accurate ESG assessment in emerging markets and be a significant step towards ensuring sustainable investments.

Emerging market debt and ESG

One of the crucial challenges of ESG investing in emerging market debt is that as compared to developed markets, EMs have an even more complex web of ESG regulations and reporting. The absence of clear frameworks is a significant challenge for sustainable investing in emerging markets. One of the key discussions from the event hosted by BNP Paribas was the necessity of enhancing ESG regulation disclosure. It is evident that a significant amount of data irregularities and discrepancies exist in the market. The report highlights biodiversity as an emerging ESG trend that investors should incorporate into their screening processes. According to the report, integrating biodiversity into ESG strategies and screening processes is one of the critical ways that capital flows can be channelled towards sustainable development.

Supporting the energy transition in emerging markets

Ensuring the energy transition in emerging markets is an indispensable aspect of ESG investing. However, compared to developed countries, the energy transition presents a unique set of challenges in many EMs, given their heavy reliance on environmentally damaging sectors such as coal and mining. This reliance on unsustainable practices stymies energy transition goals, which are further hindered by a lack of sufficient public and private sector financing. Labelled bond issuance is a key area for addressing these concerns. For instance, Hungary’s government issued its inaugural green bond framework in 2020, and the green bond issuance will be used to finance or refinance central government expenditures in the categories of clean transportation and energy efficiency, among other commitments.

Sovereign engagement

Sovereign engagement is a viable option for attracting sustainable financing, given that sovereign debt accounts for around 68% of global bond markets. Sustainable investing requires long-term sustainability metrics to track progress. The report recommends that engaging sovereigns in ESG is an essential aspect of responsible investing, given its impact on promoting ESG adoption in emerging markets.