Increasing Western focus on supply-chain disclosures will accelerate the ingestion of emerging-market ESG data into global systems, according to the chief executive of a corporate sustainability services provider.
With a large proportion of the world’s manufacturers, suppliers and logistics providers located in developing economies, new oversight rules requiring Scope 3 emissions will increase data flows from Asia, Eastern Europe, Africa and South America. Not only will that boost the available volume of data on small- and medium-sized companies outside of Western economies, it will also boost sustainability markets in those regions, said Ravi Chidambaram of sustainability data and tech provider RIMM.“Until now there’s only been some basic attention paid to emerging markets suppliers… but they are under enormous pressure right now,” Chidambaram told ESG Insight. “I have noticed a real shift in the market. I think we’ve gone way beyond that in a lot of emerging markets right now.”
CSRD Boost
The former investment banker who founded RIMM in 2020, said that the EU’s Corporate Sustainability Reporting Directive (CSRD) will be an important driver in the trend. The rule requires that major companies that trade in the EU, including overseas firms, must report indirect Scope 3 emissions in their sustainability disclosures. Scope 3 emissions include those produced by suppliers, logistics providers and distributors.
The difficulty for investors is obtaining that data from the companies that make up most supply-chain links – small- and medium-sized enterprises (SMEs) located in emerging markets. They tend to lack the capabilities to report such data and aren’t incentivised to do so by local regulators.
Nevertheless, in the absence of formal reporting rules, ad hoc disclosure practices have been adopted, sometimes as box-ticking marketing exercises, that have provided at least a basic level of data. While stock markets and other non-state organisations have managed to capture some of those emerging market companies’ ESG performance, the reports they have generated have often “left a lot to be desired”, said Chidambaram.
The increase in reported data coming from supply chains through CSRD and similar regulations is likely to close what Chidambaram calls “blind spots” in the data records of SMEs.
“Souring supply chain data is a big” development on the horizon, he said. “It really is the lifeblood of a lot of emerging market SMEs in particular.”
Green Finance
The growth of green finance in developing markets will improve the volume and quality of reported sustainability data. That’s important because emerging markets will be disproportionately affected by global warming and their need for finance to mitigate the impacts will be greater than anywhere else in the world. At the same time, data will help investors understand where their capital can best be deployed to reduce the impact of greenhouse gas emissions in the region; the World Economic Forum estimates that emerging and developing economies accounted for 95 per cent of the increase in emissions in the decade to 2022.
According to Amundi calculations, green bond issuance in emerging markets is forecast to reach about US$115 billion this year. To make those bonds attractive to international buyers, however, issuers will need to include sustainability thresholds that are acceptable to developed markets.
“We have suddenly witnessed a huge upsurge in volume in those areas,” said Chidambaram. “What’s happening now, for the first time, is the emerging markets are embracing a business case around ESG.”
AI Future
RIMM is bringing transparency to global markets through a suite of ESG tools that include its MyCSO platform. Under development also are solutions that will harness the potential of artificial intelligence. Its Transition Risk 360 tool is AI-enabled to map global climate scenarios to individual company data. RIMM also used NLP and machine learning to scrape data from public-domain sources. All work on RIMM’s ESG database on 20,000 companies worldwide.
The goal, Chidambaram says, is to give greater context to ESG data so that organisations can make better informed decisions.
“There’s general mistrust of high-level ESG data and I’m seeing an appetite for ESG data combined with non-ESG data, say financial data, to create more meaningful insights about how sustainability is affecting a company’s business performance,” Chidambaram said. “There’s a lot of things you can do with ESG data if you combine it with other things.”
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