Striking a balance between pursuing economic growth and addressing social and environmental challenges is not easy, yet it’s crucial for emerging markets. There’s no doubt that growth has lifted millions of people from poverty over the last half-century, but it has come at a cost. The climate crisis and increasing inequality are two of the most harmful side effects of the growth-at-any-cost mindset and have prompted many leaders to argue for a greater focus on environmental and social concerns. While this shift might appeal to rich nations, however, it would be harder to accept for many emerging markets where, even now, many people live below the poverty line and worry more about basic needs like food and shelter than about rising temperatures. For them, and for their nations, growth matters.
This dilemma of whether to emphasize economic growth or progress on environmental, social, and governance (ESG) issues highlights the need for alternative metrics to measure progress in emerging countries. In a new paper, we argue for creating the EMI D-ESG Framework, which measures sustainable growth that is inclusive and environmentally friendly and also focuses on governance. It consists of four pillars: “D” for economic growth, “E” for environment, “S” for social, and “G” for governance and thereby links economic growth to ESG. We believe that economic growth is imperative for emerging markets, not only to reduce poverty, but also to support the E, S, and G indicators. However, countries must avoid the pitfalls of growth like pollution, which is covered under E, and exclusion, covered under S, and establish appropriate checks and balances, which is covered under G.
The EMI D-ESG Framework rewards progress and aims to motivate countries to grow sustainably by comparing them within their peer group of 21 emerging-market countries. The framework does not burden emerging countries with unrealistic targets better suited for developed nations. Further, it measures progress and considers the realities of today while making comparisons. The final score for each indicator is an average of the growth in the last 10 years and the score today for that country. In these ways, the framework helps ensure that a country’s efforts to improve its situation are rewarded while providing them with an analysis of today’s reality.
For example, the results for Asian countries in the 2022 EMI D-ESG Country Ranking reveal that China is an outlier because of its extraordinarily high rate of economic growth. Vietnam is also one of the fastest growing countries, a close second to China, but scores higher on measures environmental and social issues. Malaysia does consistently well in economic growth, social, and governance but lags on the environment. Indonesia is growing fast and has shown tremendous growth in social and governance.
It is time for global multi-lateral organizations like the International Finance Corporation, which created the acronym ESG, to add economic development – “D” – to their ESG measurements. Additionally, within emerging markets, there is a need to prioritize the environmental and social challenges. The shift to clean energy offers both opportunities and significant challenges. While clean energy holds the promise of reducing household energy costs over time, the upfront costs of deploying clean technologies, such as solar panels, wind turbines, and energy storage systems, can be prohibitive for lower-income economies without financial and technical support. Latin America, for example, can leverage their abundant natural resources and rich biodiversity while embracing clean technologies to transform challenges into a competitive edge in the global green economy. Strengthening regional and international partnerships will be essential to overcoming obstacles and expanding their influence in the global energy landscape.
The preservation of critical ecosystems, such as rainforests and other biodiverse regions, is a particularly urgent priority requiring international cooperation. Leaders from nations hosting these vital ecosystems have emphasized that their protection is a global responsibility, not just the burden of the countries where they exist. This shared effort is crucial to maintaining the ecological balance of the planet.
Success will not be easy and will require a stronger commitment from rich nations to assist emerging nations to fight against climate change. Even if the demands of emerging markets were not met, the COP29 conference in Baku, Azerbaijan, was a step in the right direction. The commitment of $300 billion, three times what was agreed to in the 2009 Paris Agreement, as financial assistance will help developing markets, which are suffering the most from the climate crisis, in the green transition. It is essential that all nations take a holistic and collaborative approach to support emerging economies as they try to balance economic growth with efforts to combat climate change.
This post comes to us from Lourdes Casanova, Anne Miroux, and Shailja Bang at the Emerging Markets Institute of Cornell University’s SC Johnson College of Business. It is based on their recent paper, “In Search of an ESG Framework for Emerging Markets. What about growth?” available here.