Rebalancing
In recent years, asset managers (AMs) have recognized that the most promising areas on the global ESG investment map extend beyond traditional economic centers to include emerging economies. As a result, AMs have been reallocating investments to these expanding regions, which, although dynamic, were previously overlooked. This shift is transforming capital flows and redefining the future of ESG investing.
At the core of this change is a strong alignment between global sustainability goals and local development priorities. Investors are increasingly seeking purpose-driven returns, and emerging markets, with their young populations, infrastructure gaps, and abundant natural resources, are rapidly becoming the next frontier for ESG integration and meaningful portfolio innovation. This shift highlights a growing sense of urgency that AMs cannot ignore. This urgency is supported by market projections and rising issuance activity:
- The global ESG investment market is projected to reach USD35.48 trillion by 2025. Some high-growth scenarios suggest it could surpass USD167.49 trillion by 2034, reflecting a potential CAGR of 18.9%. While North America currently leads in asset volume, Asia-Pacific is expected to grow the fastest, with a CAGR of 21.5% over the next decade.
- In 2023, emerging market green, social, sustainability, and sustainability-linked (GSSS) bond issuance surged 45% to a record USD209 billion. This growth was driven primarily by issuers outside China, who increased transactions by about 65% to USD111 billion, while issuers within China recorded a 28% rise to approximately USD98 billion.
- India issued its first sovereign green bond in 2023, totaling INR160 billion (about USD2 billion), with a focus on renewable energy, public transportation, and water conservation. The offering was fully subscribed, signaling strong global demand for climate-aligned sovereign assets from emerging markets.
|
Region
|
Flows Q2 2025 (USD Bn)
|
Flows Q1 2025 (USD Bn)
|
Assets Q2 2025 (USD Bn)
|
Assets Q2 2025 (% Total)
|
Funds Q2 2025 (No.)
|
Funds Q2 2025 (% Total)
|
|---|---|---|---|---|---|---|
|
Europe
|
8.2
|
-7.3
|
3,004
|
85
|
5,448
|
73
|
|
United States
|
-5.7
|
-6.5
|
355
|
10
|
498
|
7
|
|
Asia ex-Japan
|
2
|
2.3
|
78
|
2
|
666
|
9
|
|
Canada
|
0.2
|
0.2
|
41
|
1
|
304
|
4
|
|
Australia/New Zealand
|
-0.2
|
0.3
|
34
|
1
|
288
|
4
|
|
Japan
|
0
|
-0.9
|
23
|
1
|
222
|
3
|
|
Total
|
4.9
|
-11.8
|
3,535
|
|
7,426
|
|
Source: Morningstar Global Sustainable Fund Flows: Q2 2025 in Review
- Based on data from the first two quarters of 2025, Asia excluding Japan showed remarkable strength in attracting capital to sustainable funds. The region recorded consistent net inflows, with USD2.3 billion in Q1 and USD2.0 billion in Q2. This performance highlights the region's resilience and strong investor confidence.
- In contrast, the rest of the world, which includes Europe, the US, Canada, Australia/New Zealand, and Japan, had a weaker overall performance. The US experienced significant net outflows and while Europe saw positive inflows, they were largely canceled out by outflows elsewhere. Asia ex-Japan's sustained growth is particularly notable as it outperformed the combined total of these other major markets for two consecutive quarters.
Emerging markets are becoming key drivers of sustainable finance due to their vast, high-growth investment opportunities (like solar and EVs) which promise high returns and social impact, though maximizing this potential requires navigating an evolving and often fragmented regulatory environment.
Regulatory Divergence
Global ESG regulations are still evolving, but adoption patterns vary significantly. In some developed economies, progress has been slow due to political debates and inconsistent regulations. In contrast, several emerging economies are moving quickly, supported by unified implementation and streamlined ESG policies that enable faster compliance.
Many emerging markets are actively integrating the International Sustainability Standards Board (ISSB) framework. For example, Malaysia plans a phased ISSB rollout starting in 2026. Indonesia and Thailand are making significant progress with official roadmaps and drafts, while Brazil, Mexico, and Ghana have announced formal adoption plans.
Developed economies, however, face a fragmented ESG regulatory landscape. Europe’s CSRD and SFDR have drawn criticism for overlapping scopes and vague definitions. The SFDR, in particular, has been challenged for its lack of legal clarity and for imposing reporting requirements that many investors consider burdensome and of limited relevance. Geopolitical complexities in Europe have led to a deprioritization of sustainability. The region is now shifting its attention toward economic growth, competitiveness, and defense. In the US, federal climate disclosure rules have stalled, creating a sharp contrast with proactive state-level measures such as those in California. Meanwhile, political opposition, including calls from former President Donald Trump to roll back ESG-related policies, has added complexity and uncertainty to the regulatory environment.
The core divergence in regulatory motivations, especially the influence of political agendas, has created distinct ESG landscapes. Emerging markets now offer a more favorable environment for ESG integration and clearer investment pathways.
Shifting Perceptions, Strategic Purpose, and Alpha Potential
The perception and purpose of ESG investing have increasingly diverged between developed markets (DM) and emerging markets (EM). In DMs, especially in Europe, recent geopolitical shifts have significantly reshaped the conversation around defense. A sector once largely excluded from ESG portfolios is now being actively reconsidered. A Sustainalytics analysis shows that the share of Article 8 European equity funds with no exposure to the aerospace and defense sector has significantly declined—from 67% in 2022 to 46% today. Meanwhile, the proportion of funds holding at least 5% in the sector has surged to 19%, a sharp rise from just 3% in 2022.
Unlike in developed markets, ESG investing in emerging economies serves a two-fold purpose: mitigating risk while generating significant alpha. The approach is clearly future-focused, highlighting high-growth industries such as solar energy and electric vehicles (EVs). For instance, India's solar capacity reached 97,384 MW in 2024, expanding at a robust annual rate of 33.7%, while China’s capacity surged to 887,930 in 2024, with an even faster growth rate of 45.6%.
The electric vehicle (EV) market is experiencing rapid expansion. In India, EV adoption is forecasted to reach 30% for private cars and a remarkable 80% for two- and three-wheelers by 2030, with annual sales potentially climbing to 17 million units. Brazil is also on a growth trajectory, with its EV fleet projected to hit 300,000 by 2029 and possibly 500,000 by 2034, driven by robust market momentum.
The sheer scale of climate transition funding needed in EMs—an average of $4.3 trillion annually until 2050—underscores the vast scope for investment. This dynamic has led asset managers to rotate capital into EMs for their strong return potential and their ability to directly drive social change through impactful projects in energy and infrastructure.
Challenges for AMs in Emerging Economies
Navigating the global ESG landscape is complex for AMs. In developed markets, fragmented and sometimes conflicting regulations, heightened scrutiny of greenwashing, and inconsistent data quality make robust reporting and due diligence more difficult. As a result, many ESG sectors have become crowded, increasing competition and putting downward pressure on returns.
Emerging markets intensify these hurdles with wider data gaps, less mature regulatory systems, and deeper institutional weaknesses. Although this environment is fertile for impact, it also carries a higher risk of greenwashing. Rigorous due diligence and sophisticated data analysis are essential to verify authentic impact and mitigate reputational risk.
Within these inefficiencies lies a compelling opportunity. AMs that commit to local market knowledge, thorough on-the-ground research, and a hands-on investment approach can unlock meaningful impact, long-term value creation, and alpha generation. Instead of serving as a barrier, these markets can offer a strategic path to superior ESG outcomes where others may see only risk.
Insights from stakeholder interviews in the 2025 IFC report, Elevating Environmental, Social, and Governance Reporting in Emerging Markets, highlight key challenges and recommendations for sustainability reporting in these regions, as shown in the chart below.
AMs need to implement a carefully tailored strategic approach to navigate these complexities and capitalize on the immense potential.
Strategic Solutions for AMs
To capture opportunities and manage the complexities of ESG investing in emerging markets, AMs need a nuanced, locally informed, and forward-looking strategy. The framework below highlights key pillars for achieving competitive financial returns while delivering meaningful societal impact:
- Strengthen Local ESG Data Foundations: Build partnerships with regional NGOs, academic institutions, and data providers to create robust, context-specific ESG datasets. These datasets are essential for informed decision-making in environments where data is scarce.
- Leverage AI for Proactive ESG Intelligence: Use technologies such as natural language processing (NLP) and predictive analytics to detect early ESG signals, anticipate emerging risks, and identify high-potential opportunities with greater speed and accuracy.
- Advance Global Standards with Local Adaptation: Encourage the adoption of global ESG frameworks, such as ISSB and GRI, while supporting localized implementation and regional harmonization to improve transparency and cross-border comparability.
- Invest in Regional Talent and Presence: Develop and empower local teams with deep market expertise and strong stakeholder networks. This is critical for navigating regulatory complexity and making culturally informed investment decisions.
- Embed Active ESG Stewardship: Engage directly with portfolio companies to enhance ESG performance through ongoing dialogue, collaborative initiatives, and accountability. This approach drives long-term value for both investors and communities.
Strategic Implications and Outlook
The ESG investment landscape is undergoing a significant transformation. In emerging economies, ESG is increasingly recognized as a forward-driving force for outperformance, with capital being intentionally directed toward fast-growing sectors such as renewable energy and electric mobility. These regions are not only setting ambitious sustainability agendas but also fostering innovation and inclusive growth.
Meanwhile, developed markets are navigating a more complex environment. Geopolitical tensions have led to a pragmatic reassessment of industries like defense, creating a distinct divide between funds that adapt to evolving realities and those that remain anchored to outdated exclusions.
Asset managers are shifting from a limited focus on ethical screening to a broader agenda centered on strategic growth and alpha generation—making it crucial to reimagine traditional ESG frameworks. This evolution calls for a more refined investment approach—one that moves beyond generic ESG ratings and embraces a tailored, integrated strategy.
To capture ESG’s next wave of performance, success will hinge on identifying companies aligned with national development priorities and capable of scaling impact through sustainable finance. In this new era, purpose and profitability are no longer separate—they are deeply interconnected.
How Evalueserve Can Empower Your ESG Strategy
Evalueserve helps AM convert ESG complexity into opportunity, especially in fast-moving emerging markets. Powered by AI and deep domain expertise, our Insightsfirst ESG Risk & Controversy Radar enables real-time monitoring and proactive risk management. We deliver tailored ESG research, assessments, screening, and thematic insights, as well as regulatory guidance and benchmarking, which help AMs remain compliant and competitive in sustainability-driven markets.
