Banks should not replicate developed-markets sustainability frameworks when financing customers' transition in emerging economies, according to international bank executives speaking at the Sibos conference Oct. 12.
"The emerging markets voice needs to be heard," said Marisa Drew, chief sustainability officer at Standard Chartered PLC. "Right now, a lot of the sustainability regulation policies and taxonomies are written for the West, OECD countries."
Emerging economies have "different starting points and potentially different timeframes" for transitioning, Drew said. Western countries, for example, have largely moved away from coal power, but it remains an important source of energy access in developing markets. "And we can't vilify people for that," Drew said.
Different baseline
"We have to say, it's a different baseline. And so therefore, what is a greener path to net zero? It might be coal to gas, because that's cleaner than coal. And let's work your way down because, in some cases, it isn't possible to jump straight to completely green," Drew said.
Some 119 banks, more than two-thirds of which are headquartered in Europe or North America, have signed up for the Net-Zero Banking Alliance, committing to reach net-zero emissions by 2050 across their lending and investment portfolios.
Yet the rapid work to standardize sustainable finance through taxonomies and regulation has led to some concerns that emerging market companies will be excluded from such financing because of difficulties in meeting standards and data requirements adopted by international investors and lenders.
"There is no one-size-fits-all. It's really important to understand your client and not to exacerbate the inequalities, but really address them and understand that there will be different transitions that apply," said Davida Heller, head of sustainability strategy at Citigroup Inc., suggesting that banks cannot replicate experiences from the developed world in emerging markets.
"We need to look at different approaches and solutions," Heller said, adding that banks need to take companies' resources into account.
Reducing barriers
An EY report released in July said it is "critical" that the sustainability investment ecosystem lowers or removes barriers for emerging economies participants, for example on sustainability information disclosures, to ensure they can benefit from private capital seeking sustainable investments.
EY has also been working on "adjusted [ESG] ratings for emerging markets corporates" to help investors and lenders assess which players are outperforming in the context of their specific market and sector, said Gill Lofts, global financial services sustainable finance leader at EY, speaking at Sibos.
"If you look at the transition pathway or the sustainability criteria in a particular country, at the moment, the corporates within that country are rated against a global scale," Lofts said. "Now, it could be that the corporates that you're investing in, in that emerging market country it is actually really knocking it out of the park in terms of their local market conditions."
In a recent position paper focused on Africa, the International Trade & Forfaiting Association also warned that standards developed for sustainable trade finance have been designed for multinational companies in developed markets, rather than SMEs in emerging markets. As such, the standards "could prove unworkable" for African companies, who will struggle to meet the data and reporting requirements. This could worsen the trade finance gap even further.