The global response to the COVID-19 pandemic has highlighted the importance of collective action and the effective use of technology across various sectors such as health, education, and telecommunication. However, the crisis also exposed the fragility of our economies, evidenced by hundreds of thousands of deaths, millions of job losses, and shattered livelihoods. Leading international organizations projected global GDP growth for 2020 to range between -8.8% and 1%, with an increase of 420 million individuals expected to live in extreme poverty as a result of the pandemic (1). The devastation inflicted by COVID-19 underscores the need for sustainable finance as we move towards recovery.
The upcoming decade represents a crucial period for emerging markets, as they must pivot their financial sectors to develop a sustainable and resilient future. Infrastructure investments are projected to reach US$90 trillion by 2030 to accommodate growing global populations. COVID-19 has compelled governments to offer substantial stimulus packages, amplifying the significance of integrating environmental, social, and governance (ESG) issues into financing decisions. Research indicates that in low and middle-income countries, every US$1 invested in resilient infrastructure can yield a return of US$4 (2). Moreover, a Morgan Stanley report analyzing over 10,000 mutual funds demonstrated that sustainable equity funds met or exceeded the median returns of traditional equity 64% of the time (3). This evidences that prioritizing both financial and non-financial returns is unnecessary, as ESG investments can outperform traditional options over the long term.
Sustainable finance encompasses more than just environmentally linked investments; it includes all financial products and services that incorporate ESG criteria into decision-making processes and policies. It aims to bridge the financial gap needed to meet the Sustainable Development Goals (SDGs) and address major global challenges, including poverty and climate change. Seven key trends are poised to reshape sustainable finance in emerging markets:
- Commitments to Climate Change: To avoid irreversible damage and keep global warming to no more than 1.5 degrees Celsius, global emissions must be halved over the next decade (4). The burgeoning green bond market aids investors in aligning their financial goals with real-world impacts, facilitating compliance with the Paris Climate Agreement and SDGs. An example is the Real Economy Green Investment Opportunity GEM Bond fund (REGIO), which has raised US$474 million to support investors in emerging markets working towards long-term SDGs.
- ESG Investment and Disclosure: The emphasis on ESG factors in investment decision-making is accelerating globally. As of 2018, 80% of the world’s largest corporations employed Global Reporting Initiative (GRI) standards, while the Dubai Financial Market launched the UAE Index for Environment, Social, and Governance (ESG) in 2020 to encourage ESG best practices among listed companies (5).
- Innovative Financing: To bridge the annual US$2.5 trillion financing gap for achieving SDGs by 2030, innovative financing models are emerging. Examples include the South African Impact Bond Innovation Fund—focused on early childhood in the Global South—and Majid Al Futtaim’s Green Sukuk, valued at US$600 million, marking a first for the MENA region.
- Sustainability-Linked Loans: Financial institutions are increasingly linking loan terms to ESG performance, with sustainability-linked loans reaching US$71.3 billion in the first three quarters of 2019 (6).
- Data for Sustainable Investments: Sustainable investments rely heavily on data that quantifies ESG metrics. A lack of robust data can hinder investment efficiency. To address this, Refinitiv initiated the Future of Sustainable Data Alliance to enhance data availability for investors and governments assessing sustainable options (7).
- Regulatory Frameworks: Regulations are essential for driving sustainable finance in emerging markets. Before 2018, sustainable financing regulations were limited to China. Emerging markets are increasingly focusing on establishing regulations and guidelines. For instance, Indonesia introduced a Green Finance Roadmap, and Brazil’s central bank established voluntary requirements for monitoring environmental risks (8).
- Post-COVID Sustainable Financing Focus: The pandemic has drawn attention to pressing social issues such as health and employment. While economic recovery remains a priority, sustainability and resilience must be at the forefront to ensure that recovery efforts align with the goals of meeting SDGs and climate change targets.
In conclusion, the path to recovery post-COVID-19 necessitates a commitment to sustainable financing to mitigate the economic vulnerabilities revealed by the pandemic. Emphasizing ESG criteria in investment decisions will not only bridge the financial gap but also establish a resilient foundation for emerging markets in the future.
