For Emerging Markets, ESG Will Not Work Without Economic Growth

By Lourdes Casanova, Anne Miroux, and Shailja Bang Shah

Growth has been seen as the primary aim of economic activity by which millions have been lifted out of poverty over the past half century. But this growth has come at a cost. The climate crisis we face today is probably the most significant casualty of the “growth-at-any-cost” mindset that prevailed for so long. The question of how much to prioritize growth versus societal demands regarding environmental, social, and governance (ESG) goals is squarely on the table.

Given the seriousness of the climate crisis and societal challenges such as growing inequality, many experts see a need to focus more on environmental and social concerns rather than preserve economic growth as a priority. This is particularly true in rich nations, where large portions of society have achieved levels of relative wealth.

However, this change in perspective can be hard to accept in many emerging markets, where even now a large part of the population lives below the poverty line. While we worry about rising temperatures, people in emerging economies are more concerned about basic needs such as food, water, clothing, and shelter. For them and for their nations, economic growth matters more.

But neglecting environmental and societal concerns is not an option either. Rising pollution and heat wave concerns in New Delhi and clean water crises in Jakarta are just early signs of a bleak future that will bring more inhumane conditions to emerging nations.

This highlights a dilemma: Whether to prioritize economic growth or ESG goals. Should Mumbai focus on infrastructure development, which might bring a solution to an overloaded public transportation system serving 10 million commuters? Or should it first solve its poor air quality, which causes widespread health problems?

Alternative metrics to measuring progress in emerging markets could help

At the  Emerging Market Institute (EMI) in the Cornell SC Johnson College of Businesss, we have added a “D” to the usual ESG acronym. The EMI D-ESG Framework, published in the EMI report 2022, provides a way to measure sustainable growth that is inclusive, environmentally friendly, and also focused on governance. (The choice of “D” is a reference to development.) This is part of an EMI D-ESG Framework series:

• In search of an ESG Framework for Emerging Markets. What about growth?
• In search of a D-ESG Framework for Emerging Markets: What about environment? Latin America, a green power
• In search of an ESG Framework for Emerging Markets. What about Social Challenges? The case of Nigeria, India and Indonesia

We believe that economic growth is an imperative for emerging markets, not only to achieve poverty reduction but also to support ESG targets. At the same time, countries have to avoid pitfalls around growth such as pollution, exclusion, and inadequate checks and balances, which is also where ESG values come into play.

The EMI D-ESG Framework rewards progress and aims to motivate countries to grow sustainably. It compares 21 emerging market countries within their own peer group. The framework does not burden emerging countries with unrealistic targets better suited for developed nations. Further, it measures progress and considers today’s realities when making comparisons by factoring in a decade’s worth of readings.

Looked at through this framework and the 2022 results, Vietnam is one of the fastest growing emerging markets, with a D-ESG score just below that of China, thanks in part to good environmental and social scores. Malaysia and Indonesia are doing well on economic growth and social and governance, but lagging on the environment. In the case of the Philippines, lagging ESG ratings offset fast economic growth. India, too, lags on environmental and social concerns.

The term ESG was first coined by the International Finance Corporation, part of the World Bank Group, in a 2005 study. It is now time for the World Bank and other global multilateral organizations to attach development to their ESG measurement toolkit, especially when it is applied to emerging economies. Growth will continue to be a priority for emerging markets, but it needs to be combined with ESG to ensure sustainable and inclusive long-term development. Success will not be easy and will require more help from rich nations for the fight against climate change.

Both financial assistance and the affordable transfer of green technologies will be needed. The $300 billion commitment of aid made at the COP29 United Nations climate conference by developed nations is woefully short of what will be needed by developing countries; the shortfall has been estimated at more than $700 billion. Emerging markets were disappointed by the developed nations’ meager support during the pandemic, and this approach will not work for the climate crisis.

Hence, principles and structures of global collaboration must be reconsidered. A holistic and collaborative approach is necessary to support emerging economies to tackle the dilemma of growth versus climate change.

Organizations such as the World Bank can play a key role in this reconfiguration. Societies in the Global North must realize that there is only one planet, shared by all. We must protect our shared environment while raising everyone’s living standards, especially those of our fellow world citizens living in emerging and developing nations.

About the Authors

Lourdes Casanova is senior lecturer at the Samuel Curtis Johnson Graduate School of Management and Gail and Rob Cañizares Director of the Emerging Market Institute at the Cornell SC Johnson College of Business and coauthor of the Emerging Markets Institute Annual Reports.

 

 

Anne Miroux is a faculty fellow at the Emerging Market Institute and coauthor of the Emerging Markets Institute Annual Reports. She has 30 years’ experience at United Nations Trade and Development (UNCTAD).

 

 

 

Shailja Bang Shah is the head of research at Portulans Institute. She specializes in thematic research and managing composite indices and focuses on sustainable development in emerging markets. She coauthored chapter four of the Emerging Markets Report 2022, “Emerging Markets Economic Growth and ESG (EMI D-ESG) Country Ranking 2022.” She previously worked at J.P. Morgan in geopolitical and macroeconomic research.