A new report from the World Bank’s private finance arm IFC has issued a series of recommendations to counter what it terms “current lagging investor demand” for sustainable emerging markets indices.
Despite a proliferation of such indices in the last few years, the IFC says they have had “limited success in attracting a large investor base”, which the body puts down to a variety of factors. Among them is that investors are focusing on active sustainable investing in emerging markets – while the indices generally don’t incorporate detailed financial analysis. With short track records and a lack of historical information, investors are “challenged to understand” their potential. In addition, a “lack of clarity” and “proliferation of approaches” causes confusion and affects investors’ interest in indices.
“To facilitate investor demand for sustainability indices, it is critical for investors to be able to identify and select indices that align with the investment and sustainability goals that they seek,” the report states. It was compiled with Esty Environmental Partners and had contributions from a range of companies and investors.
Investor contributors included CalSTRS, Colonial First State Global Asset Management, F&C Investments, Henderson Global Investors, HSBC, KLP, Pax World,AP2, State Street Global Advisors, Sustainable Asset Management and VicSuper.
The report Assessing and Unblocking the Value of Emerging Markets Sustainability Indices contains five recommendations:
- Improve transparency
- Develop metrics to meet investor needs
- Research on how company sustainability impacts financial performance
- “Rigorous and consistent assessments”
- Focus on materiality and engaging with companies in multilateral reporting
“This landmark study provides a concrete set of recommendations to unlock this potential and trigger meaningful dialogue among investors and service providers on sustainable investing,” says IFC Vice President of Business Advisory Services Rachel Kyte.
In the near term, indices could benefit from a “collaborative model”, the report argues. In the longer term, indices can help demonstrate the materiality of corporate sustainability by focusing on the “business upside”.