Paris Agreement goals are unachievable unless more capital is mobilised to support the transition to a more sustainable economy in developing countries. Yet, emerging markets are often overlooked by institutional investors, according to a report by Pensions for Purpose.
Supporting emerging markets in their transition to a more sustainable economy is crucial to achieve the Paris Agreement goals. However, less than 0.1% of UK pension assets are allocated to developing economies.
This is according to the latest report by the UK’s Pensions for Purpose platform, which highlights the urgent need for developed markets to mobilise sufficient financial resources to address the $4trn (€3.6bn) funding gap to achieve the United Nations Sustainable Development Goals (SDGs).
A significant portion of this funding gap is linked to the energy transitions in emerging economies, critical to achieving net-zero targets. Yet, emerging markets are often overlooked by institutional investors.
The report, commissioned by investment firm Ninety One, argues that while emerging markets may require more due diligence, these regions offer many opportunities to achieve strong returns while significantly addressing global challenges.
Karen Shackleton, chair and founder of Pensions for Purpose, emphasised that UK asset owners have the potential to drive transformative change in EMs. However, this requires a shift from the traditional net-zero investment lens focused on developed markets.
“To truly address the global climate crisis, asset owners need to broaden their perspective beyond their own portfolio’s net-zero metrics and consider their real-world impact,” said Shackleton.
“Our report shows engaging with emerging markets is a necessary pathway to achieve tangible global sustainability outcomes.”
The report argues that using developed market investment frameworks in emerging markets is counterproductive as the risks, opportunities and challenges in these regions vary significantly.
The paper also sheds light on asset owners’ perspectives on impact investing in emerging economies.
Among the key challenges preventing impact allocation to EMs, according to the participating asset owners, is centred around poor governance, a lack of well-structured impact opportunities, and challenging political environments.
This was followed by investors’ perceptions of the high-carbon intensity seen in many emerging market investments. Additionally, 28% of participants interviewed said they were prioritising impact investing in development markets, hoping to expand to emerging markets in the future.
A different ESG Lens
A key recommendation of the report is that ESG strategies should be adapted for EMs. While in developed markets ESG efforts tend to emphasise environmental concerns, in developing economies, governance and human rights are often more pressing issues. This tailored approach is crucial for risk mitigation and impact generation in emerging markets.
Moreover, emerging market investments offer substantial potential for strong returns. According to the report, some emerging market indexes are overly concentrated on a few countries, failing to provide a comprehensive view of the opportunities available in other developing regions.
Daisy Streatfeild, sustainability director at Ninety One, stressed the global relevance of EMs, noting that they contribute over half of the world’s GDP and house 85% of its population. “Investment in these regions is critical to achieving global net-zero goals,” Streatfeild said.
