Rating agencies use norms not relevant to emerging markets

Arabian Post Staff

ESG rating agencies are one of the main barriers to increasing investment in emerging markets, with a core challenge being that many rating agencies use KPIs that are not relevant to emerging markets, a study by Future Investment Initiative (FII) Institute, a global non-profit foundation dedicated to tackling global challenges, has revealed.

While there has been a surge in ESG investing over the past decade, with an estimated USD $38 trillion in sustainability-led assets now under management worldwide, emerging markets continue to receive less than 10 percent of ESG capital flows, despite accounting for 58 percent of global GDP. The new Inclusive ESG Tool has the potential to help reduce an ESG investment gap of USD $5.4 trillion in emerging markets.

In 2022, the FII Institute developed the Inclusive ESG Framework and Scoring Methodology to to improve the quality of data on ESG in emerging markets and empower companies in these markets to receive financial flows. The tool answers the key question for investors: “What does good ESG performance look like in emerging markets?”

This year, with the unveiling of the Inclusive ESG Tool and Score, FII Institute recognized the need for metrics that are tailored specifically to the challenges of emerging markets. Its systematic materiality approach emphasizes industry risk, ensuring an equitable evaluation of companies operating within diverse sectors. To promote transparency and accuracy, the score differentiates performance and disclosure analytics.

The primary analytic of the toolkit is the Inclusive ESG Momentum Score, which integrates current performance and ongoing change in companies’ sustainability performance. It acknowledges corporate commitment in driving positive change by indicating future ESG performance. Combined with a company’s current ESG Performance Score and Disclosure Score, it provides a comprehensive and nuanced picture of corporate sustainability performance.

Also published on Medium.