Environmental, Social and Governance (ESG) investing is gaining popularity in developed countries, but investment funds barely flow into developing markets. In an attempt to embed the Sustainable Development Goals (SDGs) into national development plans, the United Nations Development Programme (UNDP) is considering promoting ESG investing in order to guide funding decisions. UNDP asked the Capstone team to identify reasons that limit the ability of ESG investing companies to devote financial resources into developing countries. Research and interviews were conducted to test the team’s hypotheses. The research and interviews involved asset-management companies, student-led endowment-investment fund, and investment-advisory and capital-markets firms.
The team determined two key drivers that limit ESG investment in developing countries: First, vague ESG criteria and weak confidence in ESG reporting limit its adoption as a valid framework. Second, market barriers in developing countries limit the flow of funds to these economies. The team found that there is no standardized definition of ESG criteria and these criteria are often adjusted depending on clients’ needs. Aside from ESG rating agencies, firms also develop their own methodology to assign ESG ratings for targeted companies. In addition, factors such as data availability, size of funds, clients’ demand, and health of financial markets, limit ESG investing capacity in developing markets. Through their research, the team provided examples and explanations to further elaborate on their findings to make ESG a better tool to achieve the SDGs requirements.