Drivers of Sustainable Investment from Domestic Institutional Investors in Emerging Market

Sustainable finance is a critical component of economic development, particularly in emerging markets and developing economies (EMDEs). However, the expansion of sustainable investment in these regions remains hindered by a heavy reliance on foreign investors who exhibit limited appetite for currency risk. This dependency, coupled with the reluctance of domestic institutional investors (DIIs) to commit to sustainable securities, has stalled the growth of sustainable finance markets.

The World Bank Group’s Finance, Competitiveness & Innovation Global Practice (FCI GP), tasked the Capstone team to examine the key levers that drive domestic investors toward sustainable investments. By analyzing a selection of countries with active regulatory frameworks promoting sustainable finance i.e.South Africa, Indonesia, Chile, Brazil and India—the research assessed the impact of policy measures on investor behavior. The study determined regulatory instruments such as taxonomies, disclosure requirements, and ESG guidance to determine their effectiveness in increasing DII participation in sustainable securities. The research focused on direct and indirect drivers to drive DII sustainable finance investments in EMDEs. Analyzing DII portfolio allocations in select countries to identify trends in sustainable investments, the ultimate objective was to create a policy roadmap for EMDE regulators, offering evidence-based recommendations on the most effective strategies to foster domestic sustainable investment activity.