By Nikolaus Lang, Global Leader, The Global Advantage Practice, BCG & Managing Director & Senior Partner; and Burak Tansan, Global Topic Leader ESG in Emerging Markets & Managing Director & Senior Partner at BCG
Embracing sustainability is the key to success for Emerging Market Companies that want to compete on a global stage – both today and into the future. Despite starting at a major disadvantage, selected companies are bridging the gap and finding ways to invest in sustainability from environment to social and governance – without sacrificing growth or profitability.
The Sustainability imperative at home and abroad
Despite emitting fewer greenhouse gases per capita than many developed markets, low- and middle-income nations are suffering some of the most devastating consequences of global warming: from flooding and wildfires to extreme heat and catastrophic weather events. The effects of climate change play out in factory closures, the migration of talent, declining school participation, and the loss of global trade (due to supply-chain or transportation disruptions). S&P Global Ratings predict that (if left unchanged) climate effects could lower GDP by 6% in Africa and the Middle East, 7% in Central Asia and 15% in South Asia by 2050.
With nearly 200 nations now committed to achieving net-zero emissions by 2050, sustainability has become a strategic imperative for companies that want to grow and operate across national borders.
Performance on environmental, social and governance (ESG) standards can be hard to measure, but these benchmarks are becoming increasingly important to a wide range of stakeholders. Financial institutions use ESG ratings in lending and investment decisions. Institutional investors are shunning or divesting from poor ESG performers. New regulations in the EU, the United States, Canada, and Australia will close markets to companies that cannot meet certain standards or charge premiums for noncompliance. Perhaps most significantly, sustainability has become a priority for consumers around the world—especially for younger consumers.
The challenge for emerging market companies
Emerging market companies (as a group) lag far behind their peers in developed markets in terms of ESG ratings. This should surprise no one; while companies in developed markets launched sustainability initiatives over the last few decades, emerging markets have had to focus on growth.
Companies in developed countries further aggravated the situation by “offshoring” carbon-intensive manufacturing industries to emerging market countries, where regulatory frameworks and government support for climate initiatives were less established. Since many large emerging companies are not publicly traded, they have had less experience in collecting and disclosing ESG-related data and practices.
Five more reasons to rise to the challenge
Having recognised the urgency of sustainability, close to half of publicly traded companies in emerging markets have committed to global net-zero emission targets and at least 35 governments have pledged to make their nations carbon-neutral.
Revealingly, companies that are pursuing ESG goals within these markets have found no conflict between these goals and strong business performance. In fact, sustainability efforts are paying off in at least five specific areas:
- Improved market access. Emerging market companies that are significant exporters tend to have higher ESG scores. Thailand’s Siam Cement, for example, is investing heavily to develop more eco-friendly cement, polymers, and other products in order to win market share in key export markets. As major trading partners impose stricter conditions on imported goods and services, companies at the forefront will not only be in a stronger competitive position but will also secure a “license to play” over the long term.
- Greater access to investment and lower capital costs. The issuance of emerging market “green bonds” continues to increase and has outperformed conventional bonds in the secondary market. When Arçelik, a leading home appliances manufacturer based in Turkey, issued €350 million in “green bonds” to fund ESG activities, it was oversubscribed by 500%. Meanwhile, assets managed by ESG-focused mutual funds and exchange-traded funds targeting emerging markets increased dramatically—by around 80%—between 2018 and 2021.
- Higher consumer acceptance. Consumers in emerging markets are more likely to care about sustainability than those in developed markets—perhaps because they have more first-hand knowledge of the harmful effects of climate change. Brazil’s Natura, the world’s largest emerging market–based cosmetics company, has distinguished itself by using natural materials that are sustainably sourced from the Amazon.
- Increased appeal to talent. BCG and other researchers have found that around 70% of Gen-Z workers say it’s important to work for an organisation that focuses on ESG. Top Employers Institute ranked Infosys as India’s best employer (and among the top employers globally) in part because of its diversity and LGBTQ+ community initiatives. This rating may give the company an advantage in recruiting prized technical talent.
- New business models. Transitioning from fossil fuels to renewable energy creates opportunities for new entrants and disruptive business models. Saudi Basic Industries, a chemical manufacturer better known as Sabic, has a portfolio of more than 90 sustainability solutions on the market. Sabic has launched Bluehero, an initiative to deploy its expertise in innovative materials, manufacturing, and thermoplastics to accelerate the transition to electric vehicles.
Pressure to meet the growing expectations of investors, customers, employees, civil society, and their own governments are forcing companies in emerging markets to set high ESG standards. While these companies may need to close wide gaps between them and their counterparts in developed countries, we see leaders in every sector making that effort, raising the stakes to find competitive advantage in the vanguard of environmental sustainability.