Various sustainability-themed indices embrace the need for deeper integration of sustainability and investments. The United Nations Conference on Trade and Development (UNCTAD) reckons that sustainability-dedicated investments are now in the range of US$1.2-1.3 trillion. The 2019 Global Financial Sustainability Report of the International Monetary Fund (IMF) cited estimates ranging between US$3 trillion (JP Morgan in 2019) to US$30.7 trillion (Global Sustainable Investment Alliance in 2018). According to the Climate Bonds Initiative, global green bond issuance, meanwhile, reached a record US$269.5 billion at the end of 2020, slightly up on the 2019 total, and could increase to US$400-450 billion this year.
The number of ESG investment funds in the European Union and the US, the two largest markets for sustainable investments, doubled from 2010 to 2019, when it reached 2,708 companies with US$813 billion assets under management. As of 2020, more than 3,000 institutional investors managing over US$103 trillion joined the UN Principles for Responsible Investment (PRI) network.
Climate change and the degradation of ecosystems affect business supply chains and production. New environmental conditions cause extreme weather events, putting many types of businesses at risk. As a result, more than 570 investors with over US$54 trillion in assets under management are signatories of Climate Action 100+, the global investor-led initiative that aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
The current global crisis sparked by the coronavirus pandemic has exposed the dysfunction of many governments in providing moral leadership on the SDGs. In turn, standards, practices, and policies adopted by non-state actors are setting the compass for sustainability rule-making and governance. These actors often possess the resources, information, and technologies required to solve global sustainability concerns. There are, however, constraints on their ability to drive the effort, especially in emerging markets.
First, although there has been a dramatic growth in the application of ESG standards, their quality and scope do not offer enough harmonization and accountability, giving rise to accusations of “greenwashing” – conveying misleading information about the environmental soundness of a company's products and practices. Only a small number of developed economies have implemented clear reporting and transparency requirements. In the absence of sufficient guidance from domestic regulators, private actors have to rely on self-regulation and seek credible metrics and tools outside their jurisdictions. Differing requirements and standards yield varied results that are difficult to compare or benchmark, diminishing their value and effectiveness in driving a competitive race to the top.
Second, despite the rising share of sustainability financing, more than 90 percent of funding remains within developed economies. The pandemic has deepened this unequal distribution. While cross-region foreign direct investment (FDI) flows have declined marginally, FDI to transition economies have shrunk by 30-45 percent over the period since the coronavirus outbreak.
Third, the preference of institutional investors for green initiatives and instruments is growing, increasing the demand for long-term sustainability projects. These investors, however, have limited presence in many emerging economies and therefore have minimal influence in these markets.
Fourth, public-sector enterprises typically have an outsized market share in developing economies. State companies often behave according to the domestic political agenda, which can be very narrow. The substantial presence of the government in the economy gives private actors much less room and opportunity to develop and pursue sustainability initiatives. Multinational companies, on the other hand, appear to be less instrumental in promoting the SDGs in emerging economies. Many of these companies continue to operate in polluting industries and contribute to existing environmental problems. This means that they have low social legitimacy and often possess little appreciation of their community and environmental responsibilities in host countries. Existing gaps and differences between their home regulation and that in a host market also create an additional constraint on the capacity of these companies for effective engagement on sustainability. They may even be viewed by sustainability activists as irresponsible or even dangerous.