For years, Western politicians and CEOs congratulated themselves for “greening” capitalism. Now we are discovering the cost of this virtue-signalling exercise: foreign direct investment (FDI) in the developing world is collapsing.
FDI flows into emerging markets have cratered from nearly 5% of gross domestic product in 2008 to just over 2% today – the weakest level in two decades, according to the World Bank. Conventional wisdom typically points to macroeconomic instability, now reinforced by geopolitical and trade tensions. However, the real killer might be less dramatic and more bureaucratic — the explosion of environmental, social and governance (ESG) rules that make it nearly impossible for companies to invest in emerging and least-developed countries.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
The Corporate Sustainability Reporting Directive forces companies to audit every supplier’s environmental and social conduct. While not yet in force, industry is busy preparing, given its extensive reach, what is essentially a parallel accounting system to financial reporting – something not made easier by multiple changes in key areas such as thresholds, timelines and reporting remits. The EU Deforestation Regulation, a piece of legislation that has been delayed and amended significantly, demands GPS data for every coffee or cocoa bean.
Only the Carbon Border Adjustment Mechanism, which taxes imports from countries that can’t meet Europe’s carbon obsession, remains largely unchanged, at least structurally. It is policy by spreadsheet – and it is strangling globalisation with paperwork. These are just some of the regulatory measures corporates have to adhere to.
Large corporations manage; they can afford armies of compliance consultants. European small and medium-sized enterprises (SMEs), and especially smaller producers in Africa, Asia and Latin America, aren’t so lucky. Many are simply being cut off from contracts they have held for years because they can’t tick the right ESG boxes.
Multinationals do the only logical thing in the face of extortionate fines: they retreat to safe, heavily regulated markets and larger suppliers that can provide the necessary documentation; developing economies lose the very capital they need to build green infrastructure or adapt to climate change, and SMEs drop out of supply chains.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataWhile no one wants to return to the days of unchecked pollution or corporate impunity, replacing economic common sense with moral posturing doesn’t make it better either. In this scenario we get less investment, slower growth and rising resentment across the developing world. ESG has become the new protectionism – virtue wrapped in bureaucracy.
If we really want to improve the lives of smallholder farmers in West Africa or South East Asia, if we are serious about the chances of SMEs in global markets, the EU need to check its regulatory overdrive soon and give these actors a voice at the table.
Martin G Kaspar is vice-president of corporate strategy and development at a German Mittelstand company and an FDI expert.
