Global sustainable finance policy needs to address the needs within emerging markets

Blake Goud
5 min readSep 23, 2022


There is a potential conflict brewing between developed market anti-greenwashing regulations and capacity among emerging market financial institutions that enhances the need to focus on making sure global sustainable finance policy leaves no one behind.

  • Sustainable finance is growing in diversity of both issuers, instruments and investors across a wide range of emerging markets
  • Limited adoption of external reviews and environmental disclosures in emerging markets raises the risks for investors facing stronger anti-greenwashing regulations in developed markets
  • To address the potential conflict of sustainable finance in emerging markets and anti-greenwashing policies in developed countries, there needs to be increased investment to support emerging market financial sector institutions

An IMF working paper released this month shows how quickly sustainable finance is evolving in emerging markets while touching on the unique challenges they face. As sustainable finance matures, the report notes, some of the policies connected to defining and measuring progress will affect both emerging and developed countries, which may have the secondary effect of either slowing or speeding up convergence in practices.

The report is intriguing because it excludes China. The inclusion of China in emerging market averages can skew the overall picture because of the huge size and growth of Chinese issuance, particularly in green bonds. The remaining emerging market universe, however, is composed of a wide diversity of issuers and includes a number of Islamic markets such as Turkey, Malaysia and Indonesia.

Until a few years ago, emerging markets were similar to each other in how they approached sustainable finance and most issuance was focused on green bonds. In particular, ‘activity bonds’, which limit the use of proceeds to certain categories of green activity, dominated the market. In subsequent years, sustainable finance across emerging markets has become more diverse, with more non-financial corporates issuing green, social and sustainability bonds and raising a similar mx of non-capital markets sustainable financing.

The report notes the limitation of activity-based instruments in emerging markets, which restricts “the issuer base to those in the relevant economic sectors, like utilities, energy or governments”. This contrasts with behavior-based instruments, where use of proceeds is not as limited and the issuer profiles are thus more diverse. Instead of limiting use of proceeds to specific activities, it is driven by outcomes measured through specified key performance indicators. In addition to greater issuer diversity, there is a different mix of types of sustainable financing instruments (the report identifies 10 unique types shown in the table above) across different markets.

“The rich variation within EMs is also reflected through the product mix where green bonds are dominant in China, Indonesia and Poland; social bonds are dominant in Chile; sustainability bonds are dominant in Malaysia and Peru, and sustainability-linked loans are dominant in Russia and Turkey. Analysis also shows that while country-level ESG ecosystems remain highly concentrated in nature, there is a notable rise in breadth even within countries.”

The preceding figures show the widening range of issuance within and between countries using sustainability-linked bonds and loans, social bonds, green bonds and loans, and sustainability bonds. This diversification is found in both emerging and developed economies, but has become more noticeable recently in emerging markets.

Some of the differences are driven by different issuers having different investors with different preferences for what the investors want to fund and how comfortable they are with different structures. Different structures match the funding needs of different issuers in different countries differently, as seen during the Covid-19 pandemic, when social or sustainability issuance saw rapid growth.

The evolution of the market in emerging markets is promising on the one hand where greater issuer diversity shows investors are recognizing the role of labeled bonds and loans. However, the growth in issuance volumes has been met with more limited disclosures and the data that investors rely on to assess the quality of outcomes related to different instruments.

Many, but not all, issuers of activity-based instruments have external reviews and make disclosures in line with guidance such as ICMA’s green, social or sustainable bond standards and principles. Sustainability-linked instruments have fewer guidelines showing best practice, and even for listed companies, underlying ESG disclosures are less readily available and less regulated in many emerging markets.

The IMF working paper makes the point that environmental disclosures in particular are less common even than social or governance disclosures. The current status of disclosure and standard gaps often means wide variability between the information presented by issuers from different countries. As the diversity increases in issuers and instruments used, this carries the risk for investors of having labels that don’t reflect the reality across all instruments.

As investors, particularly those impacted by stronger anti-greenwashing regulations, look forward, the working paper’s recommendations make sense. These recommendations include strengthening global climate information architecture, defining green finance, and developing global sustainability disclosure standards. All are important, but carry some risk in how they impact development of sustainable finance in emerging markets.

Specifically, the pushing out of investor expectations on avoiding greenwashing to companies in emerging markets could face push-back if too much is merely imported through investment flows from developed country investors. The antidote to pushing back on these lines is to ensure that emerging market issuers, financial institutions and investors share responsibility for development and implementation with suitable incentives and capacity-building support. These are also included in the policy recommendations of the working paper. But it is important that they be carried forward with the same vigor as regulations to counter greenwashing, to make the growth of sustainable finance in emerging markets sustainable.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.