In 2000, when the world began to pay more attention to the activities of western multinationals in developing countries, troubling reports emerged of under-age workers in clothing factories in Cambodia. These revelations — along with a BBC documentary that uncovered sweatshop conditions in factories used by Nike and Gap — prompted companies to cancel their contracts with Cambodian suppliers. Prospects for those workers left without jobs would have been dismal. Five years later, when another 20 Cambodian garment factories were shut, the UN raised its concern that the situation risked pushing thousands of women into prostitution. In 2022, leading consumer brands would be unlikely to make such a decision. Instead of simply cutting problematic operations from a supply chain, companies focus on engaging with suppliers to improve conditions and eliminate bad practices. The long shadow cast by the Cambodian sweatshop stories still affects today’s sustainable investing industry. Many environmental, social and governance (ESG) investors fear the risks posed by emerging markets. Rather than contribute to improving livelihoods and conserving natural resources, they simply exclude or reduce their exposure. “It’s a strange morphing from the starting point, which was ‘how can investment make the world a better place’, to the place we are now, which is ‘how can investment not expose me to risk and make me more money’,” says Stuart Theobald, co-founder of Intellidex, a research consultancy that specialises in African capital markets and financial services.

A study by the company, conducted for the UK government in June, included interviews with 52 market professionals. It found that by screening out investments that fail to meet benchmarks on issues such as corruption and inequality, ESG strategies could direct capital away from emerging markets. Like the Cambodians who lost their jobs in 2000, markets are left short of the funds they need to thrive. And the gap is yawning. The annual shortfall in the investment required to meet the UN’s sustainable development goals stands at $4.3tn for developing countries, according to Unctad (the UN Conference on Trade and Development). To address climate change alone, an extra $2tn a year will be required in emerging markets excluding China, says Nigel Topping, the UK’s UN high-level climate action champion. “We know that 70 per cent plus of that needs to be private finance,” he says. Colin Mayer, of Saïd Business School at Oxford university, worries that private finance could be blocked by the ESG approach. “The potential effect on market flows is substantial,” he says. “In essence, [ESG] is a mechanism for encouraging investment to flow out of relatively high-risk emerging markets into what are perceived to be less exposed developed markets.” This is not to say that investors whose portfolios include stocks from emerging market countries are without challenges. When we asked FT Moral Money readers what they considered the biggest risks in such markets, almost all pointed to corruption and poor governance, with three-fifths highlighting political instability. As well as threatening to starve emerging markets of capital, avoiding investment in them could have further perverse effects. As with divestment from fossil fuel stocks, it may mean that ownership of the assets will rest instead with investors who are less concerned about sustainability. “What it does is shift companies from investors who have a concern about these issues to those who are largely indifferent to them,” says Mayer. Alison Taylor, a specialist in ethical business at New York University Stern School of Business, goes further. “This is arguably worse than divestment out of oil and gas, because if you divest from a country, you leave it to organised crime, terrorist financing and violence,” she says.

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