FII Institute releases ESG tool to help unlock investment in emerging markets

By Michael Nelson

The Future Investment Initiative (FII) Institute, in partnership with ESG Book, has unveiled a new ESG tool dedicated to improving the quality of data on ESG in emerging markets to help companies in those markets to receive financial flows.

The ‘inclusive ESG tool and score’ is designed to unlock investment into emerging markets by using an inclusive methodology, stripping out factors that can discriminate against emerging market companies in favour of metrics that level the playing field.

While there has been a surge in ESG investing over the past decade, with an estimated $38trn in sustainability-led assets now under management worldwide, emerging markets continue to receive less than 10% of ESG capital flows, despite accounting for 58% of global GDP. According to ESG Book’s calculations, the inclusive ESG tool has the potential to help reduce an ESG investment gap of $5.4trn in emerging markets.

“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,” said Richard Attias, CEO of the FII Institute.

“Global financial markets are more interconnected and driven by change than ever before, and investing in ESG 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.”

Ratings agencies use irrelevant KPIs

ESG ratings agencies were identified as one of the main barriers to increasing investment in emerging markets in interviews conducted by the FII Institute, with a core challenge being that many rating agencies use KPIs that are not relevant to emerging markets.

With that in mind, the FII Institute said its systematic materiality approach emphasises industry risk, ensuring an equitable evaluation of companies operating within diverse sectors. The score also differentiates performance and disclosure analytics to promote transparency and accuracy.

The primary analytic of the toolkit is the inclusive ESG momentum score, which integrates current performance and ongoing change in a companies’ sustainability performance while acknowledging corporate commitment in driving positive change by indicating future ESG performance. Combined with a company’s current ESG performance score and disclosure score, it should provide a comprehensive and nuanced picture of corporate sustainability performance.

Daniel Klier, CEO of ESG Book, added: “The inclusive ESG score is a next generation tool for investors that identifies the sustainability leaders of today and tomorrow, with a transparent, data-driven approach that is tailored to emerging markets. Through this partnership, we look forward to providing a solution that enhances investment decision-making, and in turn helps to drive greater ESG investment flows to emerging market companies.”