Inclusive ESG Tool Unlocks Investments in Emerging Markets

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by | Oct 31, 2023

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A new tool focused on unlocking the potential of environment, social, and governance (ESG) efforts has been unveiled by the Future Investment Initiative (FII) Institute, a non-profit foundation that tackles global issues and could help resolve a funding gap that is said to be in the trillions of dollars.

According to the FII, the Inclusive ESG Tool empowers companies to improve their sustainability efforts and results while providing investors with transparency. Development of the tool comes after FII Institute launched the Inclusive ESG Framework in 2022. For the Inclusive ESG Tool, FII Institute partnered with ESG Book to provide a tool and score for investors to analyze ESG performance.

The tool also targets specific gaps currently found in emerging markets.

ESG Reporting Significance

The tool comes as ESG reporting has been increasing in importance over the past several years. New requirements and standards are also coming into the fold across the globe, with the International Sustainability Standards Board (ISSB) issuing its first-ever standards related to sustainability disclosures by companies. The standards were taken under review in the United Kingdom earlier this year, with the aim of creating a common language around climate-related impacts and risks of companies.

Amid the surge in ESG reporting requirements, companies are trying to adapt, but few are actually prepared to meet these emerging standards. One recent survey from KPMG found just 25% of companies said they are ready for ESG assurance with regulatory deadlines looming in the future. The majority of businesses still have their work cut out for them with climate-related reporting, leaving the door open for solutions providers.

There are also certain markets where ESG efforts are behind the curve. Currently, emerging markets receive very little of the ESG capital flow — less than 10%, according to FII. In fact, there is an estimated $38 trillion in sustainability-led assets now under management worldwide, but only 3.4% were held in emerging markets in 2021. Comparatively, these markets held 20.2% of total global assets under management in 2021.

That’s a gap of $5.4 trillion that could be met via the new ESG Inclusive Tool, FII stated.

“Our planet faces immense challenges, including global warming, a rapid decline in biodiversity, and an increasingly unbearable cost of living for many. However, we are not without the means to address these issues,” Richard Attias, CEO, of FII Institute, said in a statement. “Our global financial markets are more interconnected and driven by change than ever before. Investing in ESG (Environmental, Social, and Governance) initiatives plays a pivotal role in the solution. These funds should be strategically directed toward emerging markets where their impact is most needed, all while ensuring the returns necessary for the vitality of these markets.”

An Inclusive ESG Framework

FII noted that ESG rating agencies are a top barrier to increasing investment in emerging markets, with these agencies using KPIs that are not relevant to emerging markets. With this in mind, the FII Institute developed the Inclusive ESG Framework and Scoring Methodology with metrics tailored specifically to emerging markets, with a special focus on industry risk.

The tool measures the Inclusive ESG Momentum Score, integrating current performance and ongoing change in sustainability performance. The corporate sustainability performance is determined by a company’s current ESG Performance Score and Disclosure Score.

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