FII Institute Unveils ESG Tool To Reduce $5.4 Trillion ESG Investment Gap in EMs

The Future Investment Initiative (FII) Institute, a global non-profit foundation dedicated to tackling global challenges, has unveiled its Inclusive Environmental, Social, and Governance (ESG) Tool and Score at the recently held annual FII flagship conference to improve the quality of data on ESG in emerging markets (Ems) and empower companies in these markets to receive financial flows.

The initiative has been developed in partnership with ESG Book, a global leader in sustainability data and technology.

The FII Institute’s Inclusive ESG Tool has been developed to empower companies in these markets improve sustainability efforts and results while helping investors identify current and future performance leaders.

While there has been a surge in ESG investing over the past decade, with an estimated $38 trillion 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.

The new Inclusive ESG Tool has the potential to help reduce an ESG investment gap of $5.4 trillion in emerging markets.

Interviews conducted by FII Institute with leading global investors have revealed that 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.

In 2022, the Inclusive ESG Framework and Scoring Methodology developed by FII Institute met this need by answering the key question for investors: “What does good ESG performance look like in emerging markets?”

Meeting Challenges in EMs

This year, with the unveiling of the Inclusive ESG Tool and Score, FII Institute recognised the need for metrics that are tailored specifically to the challenges of EMs. Its systematic materiality approach emphasises 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.

Based on the new score, FII Institute and ESG Book have co-developed a Top 250 Inclusive ESG Ranking to identify the most sustainable emerging markets companies.

The ranking has launched alongside the new tool at FII Institute’s flagship conference at FII7 conference held in Riyadh last week.

Richard Attias, CEO, FII Institute, said that the planet was facing 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.

“Our global financial markets are more interconnected and driven by change than ever before. 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,” Attias added.

Dr Daniel Klier, CEO, ESG Book, said that they were collaborating with FII Institute to usher in a new approach to ESG data in emerging markets. 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,” he added.

In 2021, 3.4% of global ESG-based assets under management (AUM) were held in emerging markets, while 20.2% of total global AUM were held in emerging markets. This equates to a gap of $5.4 trillion.