Bridging the ESG data gap: Empowering emerging markets for sustainable infrastructure development

According to the International Energy Agency, the investment in concessional funding necessary to accelerate the energy transition in emerging markets alone must reach USD 80-100 billion by the early 2030s.¹ Following further contributions from major economies at COP28, the Green Climate Fund, the world’s largest source of coordinated global climate finance, has now secured USD 20.6 billion in pledges.

As emerging markets undertake ambitious projects and leverage this funding to attract additional investments in alignment with global sustainability objectives, the need for standardized ESG data reporting becomes crucial to demonstrating impact and ensuring smooth progress. However, these economies face significant challenges in gathering and reporting ESG data, potentially hindering the flow of capital and stalling sustainable development in areas where its impact is most needed.

There is an ever-increasing importance placed on standardizing ESG data and reporting for infrastructure projects seeking funding. Investor demand for increased transparency and ESG efforts by managers, alongside the growing presence of sustainability disclosure regulations in the EU, have begun to establish clear reporting practices. These practices shed light on a project’s ESG performance, aiding investors in decision-making by providing a common language for assessing risks and opportunities.

A 2021 survey by Benchmark Gensuite revealed that 85 percent of investors, including 91 percent of institutional investors, consider investment-grade ESG data more important than other company data when informing their investment decisions.² Leading tools like GRESB are at the forefront of setting the standards in the infrastructure space. The recent addition of the GRESB Infrastructure Development Asset Assessment, a standard designed to assess the sustainability performance of developing assets, alongside the existing assessments for operational assets, emphasizes GRESB’s pioneering role in this space.

Supporting ESG data initiatives from the pre-operational phase is paramount. This approach establishes the foundation for responsible and sustainable practices, aligning projects with global ESG standards. The early integration of ESG considerations enhances project credibility and broadens the pool of potential investors. This is another reason GRESB members called for creating an assessment tailored to the development stage of a project.

For emerging markets, where much of the focus of investment will be on entirely new and potentially economically, socially, and environmentally transformative infrastructure investments, the need to lock in ESG processes and show progress from an early stage is essential. It is increasingly expected that developments can showcase good quality and complete ESG data at early-stage acquisition in due diligence processes, particularly as ESG regulations often capture development phases and operational assets.

Emerging markets confront a substantial hurdle in establishing robust processes for collecting and reporting ESG data. Regarding data collection alone, there is a clear gap in availability. A mere 39 percent of companies in the FTSE Emerging Index disclose Scope 1 and 2 emissions, highlighting a critical data gap (FTSE Russell). Contrast this with 98 percent of those reporting to the GRESB Infrastructure Asset Assessment, where Europe, the US, and Oceania still dominate the benchmark. However, data access and data quality are also concerns. Managers have expressed that where data does exist, the lack of quality and ability to use the data for analysis is hindering progress.

A a potential market failure looms over sustainable infrastructure assets in developing economies. Despite the potential for infrastructure to provide transformative impact and lasting sustainability in these regions, the gaps in data to prove this to investors may see capital earmarked to support sustainable investments flowing elsewhere to more developed economies and potentially to even less impactful projects.

Adopting ESG data by more advanced economies is a positive for sustainability in general. However, to be more effective globally, the playing field needs to be leveled so that all projects can provide investors with the data required to make investment decisions based on true sustainability performance and impact.

This underscores the urgency of addressing data quality and availability issues to unlock these markets’ vast potential. However, with existing tools, more can already be done to ensure that this market failure does not result in a lack of progress in emerging markets.

Of course, no two markets are identical and localized challenges and contextual factors continue to influence ESG practices. These nuances underscore the importance of a tailored approach, particularly in emerging markets. This is why the GRESB Foundation continues to consider the distinct dynamics of various markets when looking at changes and updates to the Standards.

Another important factor to consider is not solely relying on high ESG scores. Doing so may overlook the transformative potential of investments in emerging economies, where substantial opportunities for ESG progress exist. Equally important is demonstrating progress through year-on-year score increases and implementing best practices to foster transformative investments. The GRESB Assessments serve as a tool for investors to monitor this progress over time and provide insights into areas where changes could yield significant impact.

Recognizing these changes hinges on overcoming the data challenge. While frameworks and tools like GRESB already exist, the availability of data is pivotal to showing progress and comfortingfor investors who are ever more alert to ESG risks — especially those in emerging markets. Addressing data collection and quality presents a huge opportunity for multilateral organizations and International Development Banks (IDBs) to level the playing field. By funding technical assistance, these entities can empower companies to measure and monitor ESG aspects from the project’s inception.

Given the level of finance committed, it is in everyone’s interest to allocate a small percentage of the billions earmarked for developing sustainable infrastructure investments to ensure that, from the first stages of development, ESG data is captured, measured, and reported, enabling investments to maximize impact and allowing private capital commitment with full awareness of the potential risks.

Addressing the challenges associated with gathering and reporting ESG data, especially in the pre-operational phase, is imperative for sustainable development in emerging economies. The importance of standardized reporting cannot be overstated, acting as a catalyst for securing funding and mitigating the risk of market failure for projects with immense ESG potential. Global stakeholders must recognize the urgency of supporting ESG initiatives, fostering collaborative efforts to empower emerging economies to embark on a sustainable and equitable path of infrastructure development. By bridging the ESG data gap, we pave the way for a more responsible and inclusive approach to infrastructure investment, ensuring a positive impact on both the environment and society.

References

1. IEA (2023), Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach, IEA, Paris, License: CC BY 4.0
2. The 2021 Benchmark ESG Survey: Investor Attitudes on Company ESG Data, 2023, Benchmark Digital Partners LLC.