In the past several years, the EU has passed the most regulations and measures to guide and promote sustainability and ESG activities among businesses. The SFDR was issued almost at the same time as other climate-related measures, including EU Taxonomy and the European Green Deal. It cements the leading efforts of the continent to mitigate the adverse impact of climate change. The finance sector will play a significant role in helping the world achieve the net-zero target in 2050. There will be an investment of around $ 5 trillion in the green economy yearly from now to 2030 worldwide, and 40 % of this amount will be invested in emerging economies.
However, investment firms in emerging economies are still waiting to adapt to the SFDR, although it was influential in the EU in early 2023, about three years ago. The regulation includes 20 articles that require financial market participants such as investment funds, portfolio management, pension funds, and others to disclose Principle-Averse Impacts (PAIs). The PAIs are a set of mandatory indicators and metrics that display some sustainability-related risks created by investing activities. However, investment firms in emerging economies have still lagged behind the SFDR’s requirements in terms of disclosing sustainability risks associated with their investing behaviors.
Current research from Morgan Stanley Capital International indicates that investment firms in emerging economies are profoundly different from their counterparts in developed countries in social indicators disclosures. Specifically, the investment firms in emerging markets fell short far more often than those in developed countries. They also trail on GHG emissions-related indicators. The underperformance of these PAI indicators raises severe issues in capital transfer from developed countries to emerging countries. As a result, the effort to combat global warming has been significantly negatively affected.
To facilitate the capital transfer from advanced countries to invest in green economies in emerging markets, investment firms here should step up the efforts of being transparent in investment activities. In addition, they should develop good practices in disclosing the PAI indicators set by the SFDR.
Author: Bao Hoang, Ph.D.
