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All over the world financial investors have started trying to show that they're paying attention to environmental, social, and governance, or ESG factors in their investment decisions. That sounds like it should be good news for sustainable development in poorer nations. Right? Well, it's complicated. A recent report by the consultancy Intellidex for the UK government warned that some approaches to ESG could actually restrict the flow of funds to developing countries.
Many ESG strategies have a strong focus on avoiding reputational risk and rely upon heavy use of detailed data. That approach can steer investors away from developing countries, which often have relatively weak institutions and where reliable data can be harder to come by. This is driving calls for investors to adopt an approach to responsible investment that focuses less on avoiding risks and more on driving social benefits. For example, helping countries to make progress towards the UN's sustainable development goals.
This principle has already been widely adopted in the so-called 'impact investment sector.' which pursues non-financial targets alongside financial ones. Big financial companies, including BlackRock and KKR, have set up impact funds, although such funds only account for about 2 per cent of global assets under management. Another approach that's receiving growing attention is blended finance in which governments or multilateral institutions take on a chunk of the investment risk for projects in developing countries to encourage financial companies to invest alongside them.
One thing is for sure, this challenge is becoming ever more urgent. Developing countries are still waiting for rich nations to fulfil their promise of $100bn a year in financial support to help them respond to climate change. And with global food and fuel prices surging this year things are not going to get any easier any time soon.
