The Hidden Cost of Poor ESG Data in Emerging Markets

In emerging markets, including the GCC and broader Middle East, the quality of ESG data remains a persistent challenge. As regulatory requirements tighten—such as the UAE’s Federal Climate Change Law mandating GHG reporting by mid-2026—many firms, particularly SMEs, struggle with inconsistent, incomplete, or unverifiable data. This gap undermines credibility with stakeholders, from regulators to investors.

Poor data quality manifests in higher perceived risks, leading to tangible financial costs. MSCI research shows that companies with weaker ESG data face elevated cost of capital, with premiums observed in emerging markets (MSCI, 2024). In the GCC, where SMEs dominate the economy, these issues are amplified by limited resources for data collection and verification.

This article explores the hidden costs of inadequate ESG data, focusing on risk premiums, banking and insurance implications, and supply chain effects. Drawing on 2025 insights, it highlights trade-offs: while robust data demands investment, poor quality erodes competitiveness and increases exposure. The thesis: In emerging markets, ESG data credibility gaps act as a silent drag on financial performance, raising costs and limiting access to capital—though phased improvements can mitigate these effects.

The Credibility Gap in Emerging Markets

Emerging markets face structural barriers to high-quality ESG data. Fragmented sources, manual processes, and limited expertise lead to inconsistencies, particularly in Scope 3 emissions and social metrics. The World Bank notes that EMDEs often lack the infrastructure for reliable sustainability reporting, exacerbating risks (World Bank, 2025).

In the GCC, SMEs constitute over 90% of businesses but frequently rely on estimates rather than verified data. This gap erodes stakeholder trust, as regulators and investors demand transparency. IMF analysis indicates that unaddressed ESG risks contribute to fiscal vulnerabilities in resource-constrained economies (IMF, 2025).

Trade-offs include higher initial costs for data systems versus ongoing inefficiencies from poor quality. As 2026 brings stricter enforcement in the UAE and region, gaps risk penalties and reputational damage.

Risk Premiums and Cost of Capital

Poor ESG data directly elevates perceived risk, increasing the cost of capital. MSCI studies show that lower-rated firms in emerging markets face higher equity and debt costs, with differences in credit spreads and beta (MSCI, 2024). Firms with weak data may incur 20-30 basis point premiums, accumulating over time.

In GCC contexts, banks increasingly factor ESG into lending decisions. Weak data signals higher default risk, leading to elevated interest rates. The IMF highlights that ESG improvements reduce sovereign spreads in EMDEs, implying similar effects at the firm level (IMF, 2025).

Limitations: Sector variability affects impact; high-emission industries face steeper premiums. While data enhancements lower costs, upfront investments can strain SME cash flows.

Impacts on Banks and Insurers

Banks and insurers in emerging markets use ESG data for underwriting and risk assessment. Poor quality complicates evaluations, leading to conservative pricing or exclusions. In the GCC, banks apply ESG filters to credit decisions, with weak data raising premiums or limiting access.

Insurers factor ESG into property and liability coverage, where inadequate data heightens perceived exposure to climate or governance risks. This results in higher premiums or reduced capacity. World Bank insights show that data gaps hinder blended finance in EMDEs (World Bank, 2025).

Trade-offs: Strong data supports favorable terms, but verification demands resources. SMEs with poor data face barriers in accessing sustainability-linked products.

Supply Chain and Procurement Exclusions

Poor ESG data triggers exclusions in supply chains. Multinational buyers in the GCC demand verifiable ESG performance, and failures lead to lost contracts. The UN reports that governance issues can reduce revenue by 10-15% in developing economies due to exclusions (UN, 2024).

In emerging markets, this gap amplifies vulnerability, as suppliers with weak data are deprioritized. GCC firms face additional pressure from regional procurement standards.

Limitations: Engagement with suppliers can improve data, but requires coordination. Poor quality risks ongoing revenue losses.

Regional Implications for GCC SMEs in 2026

By 2026, GCC SMEs must navigate tightening regulations, including UAE’s Climate Law and ADGM’s anti-greenwashing focus. Poor data heightens risks amid mandatory reporting. World Bank outlooks indicate higher premiums for non-transparent firms (World Bank, 2025).

Phased approaches—starting with core metrics—can build credibility, though resource constraints persist in high-emission sectors.

Conclusion

Poor ESG data quality imposes hidden costs in emerging markets, elevating risk premiums, financing expenses, and supply chain risks. As regulations advance in the GCC, these gaps threaten competitiveness. Evidence from MSCI and the IMF shows data credibility directly influences financial outcomes (MSCI, 2024; IMF, 2025).

The key question: In a region transitioning to mandatory disclosures, how might SMEs invest in data infrastructure to turn a liability into a competitive edge?

Practical Implications

• Data Verification: Prioritize traceable metrics to reduce risk premiums and audit scrutiny.
• Financing Strategy: Use improved data to access lower-cost loans from ESG-aware banks.
• Supply Chain Resilience: Engage suppliers for better data to avoid procurement exclusions.
• Phased Improvement: Focus on high-impact areas first to manage costs effectively.
• Risk Assessment: Integrate ESG data into internal planning to mitigate insurance and credit impacts.