Managing ESG Risks in Emerging Markets: Can IFIs Get It Right?
Business Ethics Debates | read time: 5 min
Published: 20 March 2026
Opening remarks
GoodCorporation’s first roundtable discussion of 2026 explored the challenges of embedding effective ESG frameworks in DFI/IFI funded projects. Attended by representatives from multilateral development banks, development finance institutions, private equity, impact investors and commercial banks, the roundtable was entitled “Managing ESG risks in emerging markets: Can IFI’s get it right?”.
Leading the discussion was Hans Peter Lankes, Managing Director at the Overseas Development Institution (ODI). Four propositions were set out, each intended to prompt discussion on whether management and application of ESG frameworks in emerging markets by international financial institutions (IFIs) has been effective.
Hans Peter began by arguing that ESG standards, as currently implemented, tend to make DFIs more risk averse. This sits in tension with their core mandate: to be additional, to provide buffers in capital stacks and to take on risks that the private sector will not. This tension is felt most acutely in fragile and conflict-affected states, where DFI engagement is arguably most needed. Shareholders do not always support institutions when operational and reputational risks materialise. The result is a set of incentives that encourages DFIs to stay away from the very contexts they were designed to serve.
The speaker’s second proposition was that differing ESG standards across institutions impose high costs and compliance burdens. These standards are required on top of countries’ own legal and regulatory frameworks; a dynamic often perceived to be imperial. Hans Peter called for a two-stage shift: short-term harmonisation of ESG frameworks among DFIs, followed by a medium-term transition towards reliance on country systems. The focus should shift to helping countries build and implement robust systems of their own.
The third proposition addressed the contribution of ESG processes to slow and costly project approvals and disbursement. The proposed remedy was simplification and a shift from individually tailored solutions to a programmatic, standardised approach. Such an approach is essential if international financial institutions are to achieve the scale of investment demanded by the development and climate finance agendas.
The fourth and final proposition addressed investing in conflict-affected and fragile environments. In such contexts, a conventional ESG compliance approach should give way to two alternatives: first, a conflict lens that prioritises political economy and conflict sensitivity as the dominant framework for decision-making. Second, a reframing of ESG not as a set of preconditions but as an aspirational outcome to be achieved through the investment itself. Technical assistance within investments can be a vehicle for helping project partners achieve standards over time, rather than requiring compliance upfront.
The discussion
Key challenges for DFIs and IFIs
The opening remarks prompted a wide-ranging discussion, with participants drawing on their own experience to affirm and, in some cases, challenge the propositions put forward.
There was broad agreement that fragmented ESG frameworks impose real costs. Several participants spoke of the challenge of undergoing multiple separate due diligence exercises for the same transaction, in some cases as many as four, with different institutions applying different standards and methodologies. Efforts to address this through mutual reliance arrangements (where a lead financier conducts full project due diligence on behalf of co-financiers) were welcomed as a practical step forward.
Participants also cautioned against framing ESG standards solely as a source of risk aversion. Several noted that standards also play a confidence-building role, particularly for institutional investors who are less familiar with emerging markets. For such investors, ESG frameworks serve as an important signal of how risks are being managed.
Impact of fragmented ESG frameworks
The observation that ESG standards can carry an ‘imperial’ character resonated with a number of participants, though views differed on the implications. Some pointed to the positive role that ESG standards have played in raising the bar around environmental and social standards in ways that have benefited local communities and ecosystems. Others noted the risk of cross-border capital exposure. Differing ESG standards across jurisdictions may create additional risks for institutions operating internationally. It was also pointed out that ESG risks can have spillover effects. The consequences of poor environmental management, such as toxic discharge affecting biodiversity, rarely remain contained within a single project and can have broader economic effects. These considerations were seen as making the case for robust, internationally recognised standards rather than locally determined ones.
Participants also reflected on the internal dynamics within institutions and the friction that can arise between environment and social teams, business integrity functions and investment teams. ESG processes work best when investment teams are engaged and supportive. Misalignment between these functions can result in inefficiency.
Aligning ESG with investment objectives
The question of whether ESG processes are viewed as a compliance exercise or as genuine risk management and value creation was another recurring theme. Participants acknowledged that ESG issues often involve trade-offs and require judgement: the example of a major solar project was offered as a case where the benefits to development and climate would need to be weighed carefully before a decision to walk away on ESG grounds could be justified. The Equator Principles framework was cited as a risk-based model which enables a more pragmatic approach that responds to realities on the ground.
There was also discussion of the distinction between ESG as a set of standards and ESG as a broader agenda. ESG is increasingly recognised as essential to business performance. Framing ESG as part of a value creation rather than as a corrective action list, was seen as a more constructive approach for working with portfolio companies and investment partners.
Open questions and emerging challenges
The debate closed with a number of questions left open for further consideration: how should success in ESG and impact be defined, and by whom? How can institutions ensure that ESG processes are communicated effectively to the market when risk management approaches are highly tailored? And how should the development finance community respond to a geopolitical environment that is increasingly less supportive of ESG frameworks, while maintaining the commitment and consistency that the agenda requires?
Conclusion
The debate illustrated the breadth of the challenge around managing ESG risks in emerging and frontier markets. There is shared recognition that the current fragmented system imposes costs. Participants were clear that the goal is not to lower standards but to make them work better for recipient countries, for portfolio companies and for broader development goals.
Achieving this will require sustained effort on multiple fronts: greater alignment among shareholders, more consistent application of mutual reliance arrangements, a clearer distinction between risk management and impact objectives, and perhaps most importantly, a genuine embedding of ESG thinking within investment teams.
GoodCorporation supports IFIs, DFIs and their investees at every stage of the ESG management cycle. Our approach to ESG is that of a value creation tool rather than a corrective checklist. We help organisations identify material risks, develop proportionate management systems and build the internal capacity to sustain good practice over time. For IFIs seeking to strengthen ESG management, at the institutional level, across portfolios and within individual investments—please contact us at info@goodcorporation.com or visit www.goodcorporation.com.
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