Developing countries are being confronted with unprecedented economic, environmental and social challenges. The COVID-19 pandemic demonstrated global disruption on a scale never seen before and has reversed progress being made toward meeting the Sustainable Development Goals (SDGs) to 2030. As countries recover from the pandemic, the compounding challenges of global inflation, debt, climate change and sociopolitical scenarios have resulted in uncertainties, particularly for small island developing states (SIDS) and least developed countries (LDCs). As countries explore new investment strategies to accelerate economic development, build resilience and balance competing environmental, economic and social pressures, the concept of Environmental, Social and Governance (ESG) as a framework for sustainable growth has gained new relevance.
The concept of ESG is used to effectively assess longer-term environmental, social and governance risks and opportunities for firms. It has gained traction in recent years with the public sector and with international finance institutions. ESG investments globally are expected to reach US$33.9 trillion by 2026 (PwC 2022). ESG investment increased even during the COVID-19 pandemic and continues to be one of the fastest growing areas of private finance. Studies have shown that the integration of ESG creates more positive investment outcomes, especially in the longer term, and enables more sustainable business practices by firms.
As a major institutional investor, the public sector can gain from ESG frameworks and concepts to facilitate more effective investment and development outcomes. Greater emphasis on ESG can provide a range of benefits, ensuring closer alignment with the financing criteria of international financial institutions (IFIs) and synergising with SDG targets related to the environment, climate and social development, including gender parity. Creating an enabling policy environment for growing sustainable investing markets also presents an opportunity for greater tax outcomes while minimising negative externalities. The fast-growing ESG bond market has potential, as bonds are a key financing mechanism that cuts across corporates, governments, municipalities and development banks at a scale and liquidity necessary for investors. Since 2020, social bonds as well as sustainability bonds have received a lot of attention. They were used by the governments to finance healthcare issues relating to COVID-19. Therefore, there is scope for enhancing existing bonds further, as they can enhance opportunities to meet the relevant development needs.
Three key challenges remain to ensure effective ESG sector outcomes and growth.
- First, the most common criticism of ESG is that it provides opportunities for companies to engage in ‘greenwashing’ – inflating their sustainability credentials while continuing business-as-usual.
- Second, the application of ESG lacks a clear or standardised definition or assessment methodology. This results in high uncertainty around scoring and impact.
- Finally, although ESG has been growing in all regions, the maturity of regulatory and policy frameworks is highly unequal. Often the areas that would benefit the most from green investment are not able to access it. Therefore, it is essential to improve sustainable investment policy frameworks, develop capacities and invest resources to build enabling regulatory environments for ESG.
At the Commonwealth Heads of Government Meeting (CHOGM) in 2022, Heads ‘acknowledged that high quality investment and infrastructure, both digital and physical, and notably clean, green infrastructure investment, is a cornerstone of sustainable economic growth’. This paper focuses on the potential benefits of ESG toward enabling sustainable economic growth in the Commonwealth. This includes possible technical assistance, capacity building and policy development on ESG for public debt management and improved public sector sustainability, including collaboration with International Financial Institutions (IFI) financing standards. Further, a Commonwealth ESG working group is proposed for developing ESG principles relevant for member countries. In particular, common approaches to sustainable finance taxonomies and carbon disclosure regulation would be beneficial. The Commonwealth is uniquely positioned for working together with member countries and international partners, involving co-ordination and advocacy toward developing ESG strategies to enable value creation and ensure sustainable development. Reorienting ESG principles and developing responsible mechanisms and strategies to capitalise investments offers opportunities for public, private and third sector organisations to work in partnership towards sustainable and resilient development outcomes, while also protecting our planet.
