It’s fashionable to talk about ESG investing. Will it make a difference to your money and your life? The Environment, Social and Governance (ESG) initiative stems from the United Nations Sustainable Development Goals (SDGs) which are supposed to be implemented by 2030. The ESG approach is a fundamental departure from the maxim of “shareholder value” of the company that dominated the free market. – market mindset to generate profits without explicitly considering a company’s responsibility to society or the planet. ESG made global headlines when the Glasgow Financial Alliance for Net Zero (GFANZ), led by UN Special Envoy for Climate Action and Finance, Mark Carney, brought together 450 members representing 130,000 billions of dollars in assets under management to unite for a “net zero specific to the financial sector”. alliances around the world into one industry-wide strategic alliance.
According to Carney, “GFANZ is accelerating the best practice tools and methodologies that are critical to ensuring climate is at the heart of every financial decision.” As a vision, ESG seems flawless, except one has to ask – whose vision? As an aspiration, will ESG deliver Net Zero? As for sweat, who will work the hardest to deliver? My immediate reaction when GFANZ was announced was: how could 450 institutions, mostly in advanced markets, with assets amounting to 1.3 times global GDP, have had so much power? If they really cared about Net Zero and ESG, how come it took so long to go from short-term greed to long-term value? If GFANZ won’t lend or invest in companies that don’t adhere to ESG standards, isn’t that more of a stick than a carrot? $130 trillion sounds like a lot of money, but how come their governments couldn’t even agree on $100 billion in real aid to emerging and developing economies (EMDE) to help achieve Net Zero? After all, much of that $130 trillion is also EMDE money that gets recycled in New York, London, Frankfurt, and Tokyo.
Also, I cringe whenever someone talks about better standards and practices, because the best standards for the financial industry may not be the same for borrowers or businesses in the real industry. Note that those who applied the best standards participated more in the 2008 global financial crisis than the low-level EMDEs who suffered the fallout. Medicines for complex and advanced economies and financial systems are not the same for EMDEs who have less sophisticated systems. Cancer drugs do not cure malaria. After forty years of working in the regulation of the financial sector to push the best standards designed by the West, my experience is that the Rest of the World would have preferred “best fit”, which means that the best should never be the enemy of good. Whenever banks and multilateral agencies insist on “best standards and practices”, their lending conditionalities have become so complex and stringent that many EMDEs could neither meet them nor access funds in a timely manner for their real needs.
In fact, ESG is a trilemma where you have to arbitrate between three factors. Harvard professor Dani Rodrik has highlighted the trilemma of democracy, sovereignty and globalization in which “the nation-state system, democratic politics and full economic integration are mutually incompatible”. Think of globalization as the environmental side, as we all live on one planet and are linked to each other through financial, supply, media and cultural networks. The way we consume and act affects not only others, but the planet as well. The social component is about inclusivity and social injustices, which is a matter of democracy, which is ideally the greatest good for the greatest number. But governance is really about sovereignty. And governance is essential, because without good governance (or discipline) at the individual, family, corporate, city or state level, there will be no order, little social justice and bad consequences for the planet.
In short, ESG matters, but if we cannot align our domestic and global governance actions, we will suffer the consequences of poor outcomes for people, profits and the planet. ESG essentially happened when companies realized that the pursuit of profit had terrible consequences for people and the planet in terms of inequality and environmental damage. Thus, social responsibility and trust governance that cares about people and the planet has moved from an expense to an opportunity for profit. Of course, consumers and employees know all about “green laundering,” which forces PR guys to launder corporate misdeeds and bad behavior. It’s the ESG part that worries me, when asset managers offer ESG products as if they were pie crusts that will outperform non-ESG companies. The facts show that currently oil and gas companies and arms producers are reaping super profits, and no one can say with heart that they are fully ESG compliant.
In cynical terms, ESG standards for companies so far are about disclosure, but not really about compliance both in spirit and in letter of ESG aspirations. As inventor Thomas Edison said, “Invention is 1% inspiration and 99% perspiration”. Truly delivering Net Zero and avoiding social injustice and harming biodiversity is mostly sweat and hard work, which means real people and companies have to deliver, while financial wizards can just pretend they’re doing their fair share of ESG oversight. In other words, I will believe GFANZ when all of their members first disclose how they themselves meet Net Zero carbon standards and treat their customers and employees fairly, rather than demanding that their borrowers or businesses in which they invest provide Net Zero via ESG. Doctors, heal yourself first. For EMDEs, the real hard work of ESG is to ensure that they have the governance capacity necessary to ensure real social inclusion and the regeneration of natural habitat. ESG is not just a private sector project, but a partnership between business, government and community that recognizes huge barriers to change at all levels. ESG requires a real mindset shift, but the sweating will only start when top leaders show they sweat and walk like everyone else, rather than just talking about it.