How to fill the sustainability gap in emerging markets and why it matters

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Burak Tansan, Managing Director & Senior Partner, Boston Consulting Group, Nikolaus Lang, Managing Director and Senior Partner, Boston Consulting Group

• Sustainability is not just the socially responsible thing to do, it’s also vital for long-term growth and value creation.
• Businesses in advanced markets have already begun to act, but those in emerging economies need to catch up.
• It is urgent for companies in emerging markets to close this gap as the ‘sustainability imperative’ reshapes global competition.

Sustainability is not just socially responsible, it’s also critically important for long-term growth and value creation. Companies in advanced economies realized this decades ago and began to act accordingly.

As companies in emerging markets make this discovery for themselves, they have a lot of catching up to do. It’s urgent for them to close this gap as the “sustainability imperative” reshapes global competition.

BCG analysis indicates a strong correlation between emerging market companies’ performance on environmental, social, and governance (ESG) maturity and performance.

Companies that are meeting ESG challenges in emerging markets are already reaping benefits that include better access to markets, capital and talent, and they’re leaving their less sustainable competition behind.

Even these higher-performing emerging market companies, however, lag far behind companies in developed markets. It’s hardly surprising, given the sharp disparities in economic development levels and social challenges of high-income and low-income nations.

At COP27, developed-market governments recognized this imbalance by creating a “loss and damage fund” to help emerging market nations become more resilient in the face of climate change.

But achieving the goals of COP27 will require the commitment of private companies in these countries – and these companies’ investors, employees, customers and other stakeholders increasingly demand it as well. Companies that fail to close the sustainability gap will find themselves at an increasing disadvantage in both domestic and foreign markets.

BCG has long published a list of “Global Challengers”— sizable, high-growth emerging market companies that outperform their peers and reshape their industries. This year, we revised our approach to look not only at key performance indicators (KPIs), but at companies’ performance in terms of environmental sustainability.

We also identified found a group of “climate pioneers” that are outperforming their peers on both financial and environmental key indicators. The message is clear: Being environmentally sustainable does not require sacrificing growth or profitability and indeed the reverse is true, being sustainable helps companies create significant value for their stakeholders.

Seven keys to sustainable success for emerging markets

We also identified common success factors among these climate pioneers; practices that are helping emerging market companies grow and prosper, which can be summarized across seven main themes:

• Embedding sustainability into the company’s purpose, business strategy, and goals
• Acknowledging the immediate profit impact of ESG initiatives, while outlining long-term returns for the company
• Collaborating closely with local policymakers and mobilizing as an ecosystem that includes industry peers, suppliers, research organizations, start-ups, technology vendors and other partners
• Making resilience and change a core organizational priority
• Leveraging and speeding up technological innovation to reach sustainability while considering new sustainable business models to capture emerging opportunities
• Ensuring organizational transformation by enabling and incentivizing leaders, engaging employees through activities like skills training, and designing a roadmap for execution
• Continuous communication and engagement with stakeholders to establish accountability in addition to science-based, publicly stated and reported targets

Reaping the benefits of sustainability

The 50 companies BCG identified as global challengers and climate pioneers are already seeing these efforts pay off in new growth opportunities, which include:

• Stronger market access. Major trading partners are already imposing more stringent requirements on imported goods and services. The companies that are fully prepared for the EU’s carbon border tax system will have an inherent competitive advantage.
• More access to investment and lower capital costs. Equity investors have embraced companies with strong sustainability records, not only to meet their own ESG goals, but also because these companies represent solid long-term investments. Furthermore, emerging market “green bonds” offer more favourable financing terms and have been outperforming conventional bonds in the secondary market.
• Greater consumer acceptance and loyalty. Young consumers, who form a large and growing percentage of the markets in emerging countries, care about sustainability and say they prefer to shop with companies that share their commitment.
• A competitive edge in attracting talent. The vast majority of Gen Z employees (those born in the mid- to late 1990s) indicate that they would want to work for organizations that have clear and ambitious ESG goals. Those younger employees are especially important in emerging markets, where the median age is 28, compared to 41 in developed countries.
• New business models. The shift from fossil fuels to renewable energy is disrupting industries and changing market dynamics all over the world. That creates opportunities for new entrants as well as for incumbents willing to adapt.

Effective leaders are putting to rest the idea that environmental sustainability means sacrificing strong financial results. Instead, sustainability is becoming a powerful source of competitive advantage and companies in emerging markets need to close the gap between them and their counterparts in developed economies as it reshapes global competition.