The massive heat wave which has hit the globe this summer is a stark reminder of how fragile our world is and how mankind has damaged our environment to the brink. Many countries in Europe, China, and even North America have been hit hard by the heat wave to the point where rivers and lakes have run dry. It is hence urgent for us to take a look at what has been brought forth as one of the means to address this and related issues, namely, ESG - Environmental, social and corporate governance.

 

To speak about ESG, we have to go back to the early days of the 21^st century. It was a time of rapid globalization that included especially the industrialization of the Global South and China stood out in the field. If one followed the promotion of ESG closely, one would find often developing countries and their economies were blamed for pollution, blamed for poor working conditions of their workers and hence violation of human rights. Again, China stood out as the most blamed as China’s rapid pace of development outshined all. But for most, raising the issue of ESG is really to ask the developing countries to be more environmentally friendly, socially responsible and have more sophisticated governance in their development efforts.

 

What we had as good intentions in the early days of the 21^st century for developing countries has been pushed by neo-liberalism to be what is considered politically correct. Hence this has now become a theme for development agencies and government bodies to promote. In effect, promotion of ESG actually is only in practical terms, impacting a very small part of society, namely, business enterprises. The core thesis involves using market forces to promote environmental and social themes. There are indeed benefits for segments of the market adopting standards for ESG. Green bonds, for example. Take a look at Luxembourg, which is now a global center for issuance of green bonds. Much of the bonds go with zero interest. And the reason for that is a number of major European financial institutions, including sovereign wealth funds, in order to follow what is regarded as politically correct, have now allocated specific percentages - 10%, 12%, 15% - of their entire portfolio to green investments. So this would allow enterprises to get lower capital costs. But it now has become a business, and the flavor changes when it becomes a business. Especially when you consider the North-South divide.

 

First and foremost, who sets the standards of measurement for ESG? Can California and Africa be measured with the same standards? Not possible. ESG really has to be looked at from very different perspectives. From the macro perspective, where its impact is responsibilities at the societal, national or global level versus at the micro level, responsibilities at the individual and corporate and governmental level. On the environmental side, at the macro level, what we have is, historically, the vast majority of emissions into the environment and pollution came from the industrialization of Europe and the United States. That’s for over two centuries. That’s the historical basis that has created the current rapid pace of global warming and lots of pollution. For developing countries, however, they’re now told they need to balance development and environmental degradation. In other words, if Africa wants power, it can’t burn cheap coal and has to buy the more expensive renewable energy. Then the big question is who will pay for it? According to studies, if India wants to balance the need, to maintain development efforts at a speed to meet the needs of its population, it will take 1 trillion dollars of subsidies. Who will pay for that? Well, developed economies have never enthusiastically embraced that requirement.

 

The other question, also a big question, who will implement it? The blue sky in Beijing right now recalls the massive pollution in Beijing just a decade ago. It was clearly the decisive actions of the government that addressed it. Could small financial incentives of market forces and appealing to the goodwill of entrepreneurs achieve the same results? The answer is no. There is a more important lesson for the developing Global South: in this instance, strong government policies and effective implementation will achieve positive results far faster and more effective than using market forces. Unfortunately, ESG is based very much on the application of market forces.

 

As for social responsibility, we have to look at the performance of developed economies themselves, which really has been lackluster. Certainly, there are companies which have done good things with or without ESG standards. But take a look at America, for example. You have companies making tens of billions of dollars a year, but, still, there are over half a million people who are homeless and living on the streets. Is that a good performance to emulate for social responsibility? No, it isn’t. If we go back even further, what about the social responsibility of colonial powers toward the former colonies? How should that be addressed? And that certainly is something that needs to be addressed.

 

And for governance, what are the standards of good governance? Who sets it? Should countries adhere exclusively to standards established by the developed economies? The governmental basis in terms of social responsibility is quite absurd. For example, the sanctions against Russian gas is absolutely detrimental to the environment. Germany, because of sanctions against Russian gas, is now burning coal and trying to reopen coal-fired power plants, which emits a lot more pollutants into the air and contributes significantly to global warming. Is that good social responsibility and governance? What about the social responsibility of government for the well-being of your people? The sanctions are also impacting the European population in terms of its food and energy supplies. That’s certainly government not fulfilling social responsibility, not setting a good example for corporate behavior. Also, another example. United States is imposing various import duties on Chinese-made solar and wind power equipment. China, because of its strong supply chain and its massive market creating economies of scale, was able to produce and is producing now over 80% of the world’s solar equipment at a high quality and significantly lower cost. Solar and wind, of course, are much cleaner, much better for the environment than coal-fired power plants. Now, imposing import duty means slowing the adoption of solar and wind power in the United States or making it just more costly and less effective in terms of reducing carbon emissions. In fact, the U.S. and the European Union have been calling on China not to finance coal-fired power plants for developing countries anymore. Western countries now have everything they want in terms of power and tell Africa that if you can’t afford new and renewable sources of energy, you can’t have power. That’s not right.

 

There are just too many potential conflicts of interests to allow ESG to become an important global positive force, especially if governments are now politicizing ESG and furthermore, those who need to are unwilling or unable to put up the capital required to allow developing countries to continue their pace of development without being hindered or made uncompetitive by these standards, which are really imposed by the developed economies.

 

ESG has gone from a good idea of wanting to do good, to become something which is considered politically correct. But now it’s become a business. Why has it become a business? Major accounting firms worldwide, at least the Big Four and consulting firms and even investment banks are now setting up divisions, recruiting people to help companies meet ESG standards for a fee. That’s how it’s become a business. Why? We now have an expression on Wall Street called greenwashing. What does greenwashing mean? It is to make your books look good, look like it conforms to ESG standards, so that you can promote your brand as being green and also access cheaper capital. That’s how it’s become a business.

 

It is certainly something which is now quite prevalent in Europe and the United States for companies to use ESG standards, or greenness, to lower their costs, reducing their capital cost and promotion of their brands. Now, is this something that really helps the world? Maybe in effect, it would help somewhat. But anything that becomes a business loses its initial theme or objective or drive. And that other part about this, who can afford to pay for this? To pay for the advisors, the consultants, and so on and so forth, to make you look green? Certainly not developing countries’ companies, unfortunately. So it’s become a business that makes Western companies look good and then increase their profitability, but certainly make developing countries’ companies or enterprises less competitive. There are some issues to be considered here as well. A number of firms in the business are helping publicly-listed companies throughout the world in making what they themselves admit as greenwashing. Unfortunately, small- and medium-sized enterprises, even some of the larger enterprises in developing countries cannot afford that luxury. So, again, it’s the Global South, which will lose out in the process.

 

I certainly hope that the Chinese government does not promote ESG as a standard and not to abide by what has been promoted by the West, but to set different standards for environmental friendliness and social responsibility, and of course corporate governance. It’s not optimistic that ESG as promoted in the last decade and a half, will create sufficient impact to address the rapidly deteriorating environment, severe social injustices, which prevail within and between countries. Even though the world has benefited from these issues being brought to the attention of the public, but ESG, as it stands now, is probably not the thing that will make the difference. It will take serious global collaboration, strong governmental policies, and serious implementation by governments, and significant financial contribution from the developed Western world to have true impact. Time is now.