When it comes to sustainability-related disclosure standards, smaller entities within emerging economies are ready to get on board, said panelists at the International Sustainability Standard Board's inaugural symposium in Quebec.
Last Friday, the panel discussed the importance of including emerging economies in the global baseline in terms of ESG matters, and how they could benefit from greater investments from global players. Ranging from sustainability experts to leaders in the blockchain industry, speakers discussed the benefits of implementing a global standard and the difficulty of bridging the gap in resources and capabilities.
"It sounds like the SMEs are not daunted by the challenge of these disclosures, but actually see the opportunity in a global baseline that it brings, especially if it's proportional," said ISSB member Ndidi Nnoli-Edozien, who was moderating the panel.
Kathlyn Collins, vice president and head of ESG at investment firm Matthews Asia, said the ISSB standards can help investors understand how companies are managing sustainability risks and leveraging new opportunities. According to Collins, having a standard across emerging markets can help collect the necessary data to know where financing is needed in terms of sustainable development goals.
A lot of investors require ESG information before putting their money to work, and Collins' company creates multiple investment products to answer their needs. To push back against greenwashing, or misleading information about a corporation's environmental impact, Matthews Asia collects a lot of data on the portfolio companies that it invests in, despite the difficulties of navigating localized reporting frameworks between countries.
"Many of the smaller banks that are focused just on lending to small and medium sectors, micro sectors, women, are found in emerging economies," said Collins. "But today, a lot of them don't have these standards and they're not reporting on some of the extra financial impacts that their businesses are having. So it makes it very difficult to put together portfolios that are intentional."
To increase the number of emerging economies adhering to the standards, training firm W. Consulting director Raymond Chamboko believes that the language of the ISSB standards should be carefully crafted for them to be understood by people who are going to be using them. He said the difficulty with the application of any standards is that people don't know what to do and often struggle to understand what words actually mean, especially when trying to translate them to different levels.
Joanna Yeo, founder and CEO of blockchain-based credit infrastructure Arukah, also stressed the negative impacts of global commitments to sustainability, causing big global buyers to refuse to purchase from small farmers unless they follow the ISSB requirements. However, they rarely reward them for doing so and don't walk them through the process, despite having the largest margin and capacity to support this transition. As a result, many platform providers took an interest in tracking supply chain credentials and bringing down the cost of adoption for smaller players.
"There's an additional level of accountability for companies listed in the U.S. or Europe who are the largest buyers, and for financiers globally who are also financing some of these things," said Yeo. "The two biggest transmission mechanisms are capital and supply chains, and having transparency so that we make sure the burden of that sustainability transition is equally held by all players in the value chain."
Bridging the gap between investors and smaller entities in emerging economies is a topic of major importance when discussing ESG disclosure standards. For small businesses and farmers, whose main interests lie in day-to-day concerns about sales pricing or cost of capital, Yeo said that platforms should explain how data collection can become decision relevant information for their business, but also lenders and investors.
However, if small businesses don't know what data to give in the first place, they are even less likely to report them according to ISSB standards.
Matthew Gamser, SME Finance Forum CEO, sees the future of collaboration with emerging economies in digital platforms, which would allow them to follow real-life transactions and get the information they need. It would not only allow them to understand sustainability risks by knowing what's going on in their fields, but also financial risks, with remote sensing data on where their products are going. Being able to integrate this data and have standards to take on sustainability challenges uniformly across many markets is a point of opportunity for Gamser.
"The challenge is to get more and more markets, particularly in Africa, where unfortunately, it's mostly very small markets," said Gamser. "The challenge is how do we get things going there, because the smaller the market, the more you've got to make life easier for the investors. If you're in China or India, they'll come to you. If you're in Rwanda, you have to make a big effort to digitize."
Gamser said that real-time digital information would not only help with sustainability, but also provide help to feed the African continent. Many emerging markets in Africa report great losses "between farm and fork" without being able to pinpoint the source of the problem, but digitalization could help ensure the land is being used appropriately and that the inputs are not being overused. It would translate into more food reaching markets, but also allow investors to track factories that employ children or pay female workers less than men.
But leveling up the reporting chain by bringing individual entrepreneurs, as has often been done, would take too long and result in higher costs. However, encouraging larger entities such as banks or big sellers to create digital platforms to inform small businesses about ISSB standards would make a considerable impact. Gamser said it's not the job of the smallest firm in the chain to figure out how to write the report, and it can be generated by the analysis of the AI or machine learning of the data if they join a platform.
"They'll go for China or India but not Africa, because the markets are too small and their standards are all different for reporting," said Gamser. "That's why we want to apply all the brainpower of the world, getting to standards, encouraging countries to harmonize as best they can. It enables this private brainpower to combine with public infrastructure to really open up opportunities."
When discussing opportunities in Africa, Eliane Ubalijoro, Future Earth global hub director, also believes that food is at the center of sustainability concerns. With crop productivity plummeting as a result of climate change, Ubalijoro has conducted knowledge exchanges between India and Africa to transition from chemically driven or subsistence farming to regenerative agriculture practices. She said AI specialists and planetary data experts will play a significant role to produce the data necessary to mitigate investment risks that are discouraging the flow of private capital in smallholders farmers in Africa. According to Ubalihoro, such initiatives would allow African countries to reach a balance between the amount of greenhouse gas produced and the amount removed from the atmosphere.
Currently, Africa receives $500 billion in subsidies to chemical inputs in agriculture every year and up to
"All companies in Rwanda want to learn, want to grow and are ready to do what is needed to adopt the necessary standards to move forward," said Ubalijoro. "Right now, climate adaptation mitigation in Africa is severely underfunded, so the combination of bringing about the needed data, the needed policy frameworks and the incentive so we get more investments coming onto the continent is going to be really critical."
Collins believes there's a great opportunity for some of the largest economies to adopt ISSB standards and mandate them. Among SASB adopters, 2,500 companies have reported or partially reported on ESG data since 2020. However, only 16% of them are below a $2 billion market cap range and among the biggest emerging market publicly listed companies, only 17 Chinese companies have used the ISSB standards, and only 11 in India out of its 6800 listed companies. So it's a huge opportunity for big EMs to take on these standards and mandate them.
So how do we move from standards to implementation? According to Yeo, the global capital needs to be proactive when it comes to the ISSB standards and actually finance them. To comply, she said that capital markets want to ensure these standards can result in better return on investment and fewer losses, but for now, most of their efforts are concentrated on educating their investors. Yeo said a regulator-friendly environment in support of education or benefits like a tax break can prove the value of that investment over a two-three year period, beyond environmental concerns.
As for Ubalijoro, it's about collectively contributing to a "global commons" that allows entities to work within the same taxonomy while navigating different languages and systems. She said immense funding is needed around mitigation and adaptation for emerging economies, and if entities are able to create value propositions that meet international standards, they can attract the needed finance to get there.
"There's an incentive for all governments and businesses, micro to large, to adopt standards that really allow those flows to come in and create financial mechanisms in local currency to have more control in terms of how climate financing happens and is distributed within," said Ubalijoro. "It's really about how do we collectively go from trying to survive the climate crisis to collectively thriving in a green nature positive net zero world. These standards are critical in terms of how we want to live our interconnectedness as humanity."
