Sustainability is changing the rules of the markets

Environment, Social and Governance are increasingly fundamental for companies, even in emerging markets

Sustainability is increasingly becoming an imperative for businesses. And the environmental aspect is gradually joined by two other factors such as the social aspect and governance. This is a trend that concerns emerging markets as well. Everywhere in the world, companies are now realizing that a touch of social responsibility or ecology is not enough to remain competitive in a market where consumers, and above all those of less wealthy countries, are increasingly demanding on these aspects and do not accept shortcuts.

A study of Boston Consulting Group investigates precisely the increasingly significant role that i environmental factors (Environment), Social and Governance (ESG) in corporate policies, including in emerging markets.

Sustainability is transforming global economic competition

The result, in a nutshell, is that companies are realizing that sustainability is increasingly relevant for their performances. And that there is a strong correlation between the ESG scores of companies, even those in emerging markets, and economic performance indicators.

Companies with great reputations in ESG factors have greater opportunities for growth, happier customers and better access to the market and credit, and are more attractive to (young) talent. Conversely, those that do not close the gap with more sustainable competitors experience a distinct disadvantage in every market, domestic and foreign.

ESG factors are not new

THEThe concept of ESG is not new, we have been talking about it since the 1970s when multinationals began to adopt standards related to ‘Corporate Social Responsibility’ (CSR)’. It then evolved, and gained strength in the last ten years thanks also to theregulatory action by the US and EU institutions which have established increasingly stringent standards also in commercial regulations, subjecting companies to growing regulatory pressure.

Similarly, now many bodies and organizations publish rating on companies based on both environmental criteria such as carbon footprinting and energy and waste management, either on social factors including human rights and working conditions, both finally on governance factors such as transparency, stakeholder rights and corporate responsibility.

It is not easy to measure ESG performance

It should be specified that ESG performance is not easy to measurein the first place because the data provided by the companies could hide or sweeten their real business and be only attempts to greenwashing. A term now in vogue that indicates a facade ecology and the use of precise communication strategies that aim to build a misleading image of the company (but also of bodies and institutions) as environmentally committed, and which they serve to hide from the public the real impact on ecosystems.

Furthermore, applying the same ESG criteria without distinction to companies from developed countries and those from emerging countries is misleading, given that the respective markets are different stages of economic development and they face very different social challenges.

Despite that, ESG ratings are increasingly used by financial institutions to guide their investments and your own decisions. According to research by Morgan Stanley, 85% of investors pay attention to sustainability, in its three forms, to decide their strategy, and have started disinvesting in companies with low scores in ESG factors.

The sustainability gap in emerging markets

From BCG’s research emerges a significant lag of emerging markets in all three ESG components: where the G20 countries record a score of 64, the companies of the 10 countries considered by the study (Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa and Turkey) stop at 48. Performance worst are found in the environmental part, especially due to CO2 emissions and the inefficient use of resources.

It should also be considered that in emerging countries the policies that regulate the markets are focused on growth rather than on the environmental impact, and are generally less mature about these aspects. Furthermore, it cannot be forgotten that developed countries have based their growth on highly polluting industries and logistics without worrying about it, which for decades have ‘relocated’ the most impactful activities to poor countries and who have used (and use) the latter as rubbish bin for a lot of your own waste.

At the moment, however, there are no shared ESG performance measurement criteria that take into account the different starting and current situations between emerging and developed countries, and this contributes to the sustainability gap which registers between their companies.

Sustainability contributes to business growth

Among the three pillars of sustainability, the environmental one is gradually receiving more attention even among companies in emerging markets. On the other hand, these countries, despite polluting less than the developed ones, are suffering the heaviest consequences of climate change. And therefore they have every interest in trying to counter the impact of economic activities.

But the key point is that profit and sustainability are not contradictory to each otherindeed they are increasingly closely related. And companies have begun to understand this.

First, whoever is developing their own ESG standards has a competitive advantage in the event of future more stringent conditions for trade. Also, it has a easier access to credit and better conditionsas well as improve its reputation with talented job seekers and consumers.

This is a very relevant aspect in emerging countries: here, in fact, the population is made up above all of young and very young people, who are more sensitive to ESG issues. As found by an analysis by BCG’s Center for Customer Insight, 77% of consumers in emerging markets are conscious of the sustainability of what they eat compared to 53% of those in developed countries. And more than 80% rate the impact of their lifestyle. An aspect that influences purchasing decisionseven if then few would agree to spend more on a sustainable product.

When it comes to finding talent to hire, the BCG study finds that about 70% of Generation Z (those born in the second half of the 90s) he is attentive to the aspects of sustainability in choosing his job. And with an average age of 28 in emerging countries compared to 41 in developed ones, the issue can no longer be overlooked.