What hinders ESG business transformation in emerging markets

Growing companies in emerging markets must go through major changes before they gain a foothold in the international market. The demands of efficiency, digitization, and ESG performance are becoming major obstacles for companies that want to scale. Therefore, it's important for CEOs in developing countries to take the right approach to growth and transformation through digitization.

Typically, a country's economic dynamism is measured by its engagement in international trade. However, for developing countries, access to the international market is hindered by a variety of requirements that are difficult for companies that haven't undergone digitization and ESG transformation to meet. These high requirements cause economic development to lag, while a number of other issues also hinder the transformation.

The practice of implementing digital transformation tools is more developed in emerging economies than implementing ESG principles. The low level of ESG transformation is largely due to a lack of understanding of the ESG transformation process and its benefits.

Currently, digital ESG solutions are barely used by companies in developing countries. In the absence of peer support and established legislation, companies lack the motivation to make changes. While digitalization can actually increase business efficiency, ESG only brings benefits in the form of potential investors and customers from developed countries, which aren’t crucial for all companies.

Scaling companies face not only the challenge of incorporating ESG principles into their existing corporate structure and business plans. They also struggle to develop methodological approaches, since no single legal framework in the developing countries establishes common approaches to defining and implementing ESG principles. This is a voluminous and expensive job that needs support and software.

Currently, the critical areas for digital innovation are business processes such as reporting, data protection, human resource management, and supply chain and logistics organization. Other areas account for a smaller share of automation and digital innovation activities. This can be partly attributed to a lack of awareness or a nascent understanding of how the ESG agenda should be presented in the company and how digitization can support its implementation.

There is now a significant demand for the development of digital solutions within the environmental area. Climate change, waste management, and biodiversity conservation are the main sectors for which the market lacks digital tools. Pollution prevention and resource conservation are also among the top ESG areas where digital tools are in short supply.

Especially, the lack of solutions across the ESG agenda is felt by medium and small businesses. The main action on ESG innovation mainly comes from large businesses because, given the paucity of necessary expertise in the labor market, they are better able to hire and train the right employees.

The problem can be solved by actively highlighting the existence of demand for digital ESG tools and encouraging the development of such tools. It’s especially worth emphasizing that digital solutions created using advanced analytics technologies – AI, the Internet of Things (IoT), blockchain, and robotics – have the greatest potential in this area.

Another possible solution is the reverse scaling of digital ESG solutions by major market players. Given the high cost of the latest and most advanced digital ESG solutions and the lack of ESG expertise in the market, the possibility of full digital ESG transformation for medium and small companies is limited. Market participants who are actively engaged in the digital and ESG transformation of their companies are considering unifying and distributing the digital solutions they developed for ESG purposes to the market. This will reduce the direct costs of developing and implementing solutions while maintaining their effectiveness.

The main driver of ESG practices in developing countries must now be local governments and new legislation. In the current situation, where development benchmarks need to be revised, the government must take on the role of driving and inspiring the necessary changes – in particular, those related to the development of ESG and digital technologies. More effort is needed to provide citizens with the necessary technology-related knowledge, financial resources, and broadband capabilities.

We expect the ongoing wave of digitization will improve socioeconomic conditions in countries, provide people with new services and jobs, and help build a better future. But we need to combine the digital and social aspects of transformation to create companies that benefit both the economy and society while not harming the environment.