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Oct 09, 2023

What does the S in ESG mean in emerging markets?

Noemi Distefano asks experienced IROs and ESG experts what the S in ESG really means to companies and investors in emerging markets

Traditionally, it’s been more straightforward to benchmark a company’s performance against environmental and governance factors – the E and G in ESG – but the S, representing the internal and external social elements at a firm, is rising rapidly in importance among global regulators and investors.

When it comes to developed economies, supply chain and distribution, company culture and behavior, human rights, modern slavery and diversity & inclusion are among the main areas of focus under the S. While some of those factors are equally important in the developing world, there are additional social values that are just as imperative in emerging economies. So what does the social element in ESG mean in emerging markets?

Rodney Gollo, head of risk at Hong Kong-headquartered firm Bupa Asia, says the value of social factors in emerging economies must be considered on two different planes: at a public policy level and at a company level. For the former, Gollo highlights adequate healthcare, employment, financial inclusion and the concept of the ‘just transition’ toward an economy less reliant on fossil fuels as the main factors.

Rodney Gollo, Bupa Asia
Rodney Gollo, Bupa Asia 

‘The structure and fundamentals of an emerging market will dictate which S issue is most relevant,’ he says. Healthcare and the lack of primary care funding are key social areas of concern in Asia, he adds.

At a company level, Gollo says labor laws differ significantly across emerging markets, as well as by sector. ‘With several emerging markets having large industrial sectors and industries employing large workforces, topics such as labor efficiency, management of employee turnover and training-capacity building become key issues to address,’ he says.

Common denominators

Diversity & inclusion is among the top social hurdles to overcome for businesses operating in emerging economies. John Gollifer, general manager at the Middle Eastern Investor Relations Association (MEIRA), says ‘gender equality, like elsewhere, is an issue in that we do not make best use of everyone available to fill senior roles.’

MEIRA operates among the IR communities in Gulf Cooperation Council markets including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE plus Egypt, Jordan, Lebanon and Palestine. In the context of IR and higher management roles, Gollifer says that while ‘IR is a more balanced employer, the number of female CEOs is a single-digit percentage figure’, although ‘the UAE, [for example], has mandated that every listed company has a woman on the board of directors. It is a start, albeit modest.’

John Gollifer, MEIRA
John Gollifer, MEIRA 

Gollifer also identifies inclusion as a key social issue, ‘given that the gap between the top and bottom of society is significant. If we are to realistically address the next generation’s needs and aspirations, we will need to think harder how best to do this,’ he states.

Rodrigo Maia, global consultant at Instituto Brasileiro de Relações com Investidores (IBRI), Brazil’s IR institute, refers to diversity as a predominant, decades-long, challenge for Brazilian companies, even before the ESG acronym was established. ‘Before sustainability reports, Brazilian firms used to publish social reports,’ he explains. ‘The S is not something new for businesses in the region – it’s been part of their foundation for years and years.’

Expanding on the social challenges for companies, Maia says even age diversity is a big stumbling block for Brazilian firms. ‘We are seeing an increase in professionals over the age of 50 occupying executive positions, though I would note that this goes alongside the fact that the average age of the Brazilian population is increasing,’ he points out.

Rodrigo Maia, IBRI
Rodrigo Maia, IBRI 

On a more positive note, some progress has been made in terms of the number of women occupying a seat at the executive level. Maia explains that some companies in the region have set internal targets to increase the number of women in executive positions from 20 percent to 30 percent, for example. If those targets are met, it would result in long-term bonuses for all executives in the company.

License to operate

Zelmira Silva, partner at InspIR Group, an IR company that operates across the Americas, says that when looking at the S element of ESG in Latin America, license to operate is one of the most crucial social elements companies and investors alike need to consider.

‘Most emerging countries are rich in natural resources but when companies want to gain access to those resources, they need to take into consideration the local community and the impact their operations are going to have on it,’ she says. ‘There are areas that have scarce government presence and it’s up to the companies to find an agreement with those communities. If that’s not the case, companies will end up having problems with their license to operate in those specific areas.’

Zelmira Silva, InspIR Group
Zelmira Silva, InspIR Group 

Maia agrees that for countries in Latin America and other emerging markets also rich in commodities it’s paramount for businesses to establish that relationship with communities as part of their ESG efforts. ‘It’s a growing trend but, historically [if you are a company with operations in Brazil], you need to take care of your community,’ he says. ‘Take the Amazon forest, for example. If you have operations there, you need to treat the local community like your treat other stakeholders.’

Maia urges companies to talk with those communities as they would with potential investors. ‘Companies would have to show their strategy to that community: what are they going to bring in terms of improvements? What’s the return for the locals?’ he says.

‘Another really important thing for IROs is to ensure the strategy they communicate to the community matches the one discussed with the board and is in line with what’s included in the company sustainability report and what they say to other investors.’

Investor expectations

Silva says a lot of Latin American companies are listed in the US, though some are also listed on their own country’s stock exchange. Either way, those companies are ‘very advanced’ in their ESG reporting practices due to a combination of peer pressure, pressure from investors and ratings agencies and, to a lesser extent, pressure from the media.

ESG pic

‘Peer and investor pressure are definitely the most impactful,’ Silva notes. ‘As a company operating in a specific industry, it doesn’t matter if you are listed on an emerging market’s stock exchange or in the US – investors are going to measure ESG disclosures with businesses operating in the same industry elsewhere.

‘We are seeing a lot of companies in the banking and financial sectors that are advancing in their ESG reporting. And when it comes to financial services specifically, for companies in Latin America the S is the most important factor.’

Even though for investors the E in the acronym remains the most important element, the S is the biggest priority for many companies in the region, Silva explains. ‘And that goes hand-in-hand with the G, because if you do not have your good governance in place, you cannot drive social development.’

Gollo also highlights governance as an area of focus for investors considering whether to make a move on emerging markets. ‘For example, in Asia there is a high instance of privately owned companies, family businesses and those entirely or part-owned by the government,’ he says. ‘Each of these models will drive different governance outcomes. As a result, topics such as board and committee independence are more prominent in emerging markets [than in] developed markets.’

Yuraisha Moodley, IR Society of South Africa
Yuraisha Moodley, IR Society of South Africa

Yuraisha Moodley, director of the Investor Relations Society of South Africa, says that in her region ‘governance has always been a critical element of the ESG landscape’, though the social aspect is gaining ground. ‘Investors and companies alike are starting to focus a lot more on the S part of the acronym, as that’s a massive issue in the region in terms of social development and poverty levels,’ she says.

‘The E has become more of a focus over the past few years, particularly with high-intensity energy users, and has become more relevant from an energy security perspective, given the challenges the country faces with its power utility not being able to cater for the energy demands of the country.’

Building trust

As ESG factors are part of a broader context in each emerging market, investor priorities may vary. ‘A favorable investment environment can make E, S or G considerations more advantageous for an investor,’ Gollo explains. ‘For example, Indonesia in recent years has seen certain positive headwinds contributing toward its growth: positive terms of trade shock from higher commodity prices, fiscal consolidation that has proceeded at pace, an abundance of natural resources tied to electric vehicles and a stable political environment.

‘This in turn can make certain ESG themes, such as the energy transition, become a higher priority and more attractive when considering investments in the country.’

ESG picture

Gollifer says investor expectations of companies’ ESG practices would mostly vary on business sector and market. ‘It’s difficult to generalize,’ he notes. ‘But we are all learning and perhaps a useful starting point is to [think of] governance as a given in acting as a broader umbrella for investors to consider.’ He argues that everything else comes under governance: ‘Without governance and leadership, not much else matters, in my opinion.’

When it comes to building trust and positive relationships with communities and stakeholders in emerging economies, Gollifer invites leaders to make careful considerations. ‘Leaders, take a good look at yourselves – look out there: what do you see?’ he asks. ‘How best do you reflect and represent your community, your employees, your customers and other stakeholders across the organization, from top to bottom? Leadership, this is your job.

‘IR plays a key role in developing the investment story, part and parcel of which must be ESG factors and how these have a material effect on the investment investors are considering. Today, IR cannot do its job without thinking of and factoring in ESG.’

He says one cannot talk about ESG and IR in isolation. ‘What’s happening right now – and is encouraging – is that from the top down through national agenda, policymakers, regulators and the exchanges, as well as IR talking on behalf of companies to their stakeholders, we have started to realize that we need to be developing ESG best practices as quickly as possible,’ he says.


‘The key driver behind that best practice development is an increasing competition for capital and investor attention among companies operating across all emerging markets.’

Silva believes a company’s best practices come down to four main approaches: opening communication channels, working with local non-governmental organizations, working closely with local governments and establishing an internal baseline at a company level to measure your progress.

‘Establishing a baseline to measure progress on sustainability goals is very important for companies in emerging markets, especially on the social front,’ she says. ‘In emerging markets there is always the risk of unethical or corrupt behavior from partners in social initiatives, so disclosure and transparency on any external social spending are paramount.’