What Sustainability Really Means in Emerging Markets

When I started the SIRI Practicum class, I expected to dive headfirst into sustainable finance tools such as concessionary loans, technical assistance, and green bonds, and how they can mobilize capital toward climate and development goals. And I did learn a lot about these tools and how they work. However, I didn’t anticipate how this course would challenge my understanding of what 'sustainability' actually means. This semester, working with a financial institution in an emerging market pushed me to ask a key question: What does “sustainable finance” mean for our client, and why is it important for them to focus on it?

Before starting the project, I was generally aware of trends in sustainable finance, particularly in developed markets. I understood how credible and standardized information on environmental performance can influence financial behavior. For example, the 2024 study 'Climate Capitalists' by Gormsen, Huber, and Oh found that across 730 European and U.S. firms, companies with stronger environmental performance had lower costs of capital - by almost one percentage point - compared to more carbon-intensive companies. Similarly, the 2019 paper 'Do Investors Value Sustainability?' by Hartzmark and Sussman shows that when Morningstar introduced its sustainability globe ratings in 2016, investor behavior shifted accordingly: funds with the lowest sustainability rating experienced more than $12 billion in net outflows, while the highest-rated funds received more than $24 billion in net inflows within the following year. These studies highlight a key point: when sustainability metrics are clear and widely available, financial markets respond to sustainability signals. Entering this project, I wondered whether such signals and trends existed in an emerging market context - and if they didn’t, why not?

While sustainable finance projects in emerging markets used similar ESG frameworks as those in developed markets, we noticed something unexpected about where capital was actually flowing. We observed hundreds of sustainable finance transactions across multiple international financial institutions and found that the capital was flowing into sectors such as agriculture, energy access, MSMEs, and women-led businesses. Understanding the historical, economic, and resilience challenges of the market made it clear why these flows made sense. The emphasis wasn’t on which projects scored best on ESG metrics, but on which sectors mattered most for resilience and development. Investing in climate-smart agriculture helps protect food security as weather becomes increasingly unpredictable. Investing in energy infrastructure addresses decades of dependence and aging systems. Financing women-led enterprises is essential not only for equity but also for expanding economic participation. In this context, sustainability cannot be separated from resilience and development, and any ESG scores won’t give you the full picture. That’s where the contrast with developed market research fascinated me. Studies like Gormsen et al. and Hartzmark and Sussman show that when sustainability is measurable and standardized, financial systems can respond. But the same logic doesn’t directly apply here. The biggest sustainability challenges in emerging markets are multidimensional and unique to each market. Here, capital flows toward what truly matters for resilience - not necessarily what is easiest to quantify.

I have learned that sustainable finance cannot be defined by a single framework or reduced to a score. The question our professor posed early in the semester - “What does sustainability mean for this market?” - forced me to rethink what sustainability means in general, not just for our client. I’ve learned that in an emerging market context, nearly every investment simultaneously touches environmental resilience, social inclusion, and economic transformation. Even though its roots lie in ESG, every market has a different starting point. In developed markets, sustainability often means reducing harm by lowering emissions, reducing waste, and improving governance. But in this market, sustainability means building the foundations that make resilience possible in the first place. However, here is where I found it complicated. International investors and development banks funding this work need to compare projects across countries; they need metrics and benchmarks to prove impact and allocate capital. Categorizing a market’s most important resilience work into standardized frameworks may misrepresent what matters or exclude it entirely. I am still exploring this tension and want to understand it better. I came into this project assuming sustainability priorities would be roughly universal, that emerging markets just needed more resources to pursue the same goals. I was wrong. From now on, when I evaluate sustainable finance projects, my first question will be: “What does sustainability mean in this specific context or market?”