Green Finance Advisor of Friends of the Earth (HK)
As ESG standards are becoming a default consideration when performing investment evaluation, it is becoming increasingly evident that developed market companies have benefitted more from the broad application of ESG standards than others. Aside from the old fossil fuel industries and materials, developed market companies have broadly benefited from lower capital costs as a direct result of generally higher ESG scores, which led to institutional investors directing more of their capital towards these companies. However, it is worth analyzing why developed market companies typically receive higher scores.
Developed markets are typically associated with a higher score for social and governance, with legal codes protecting labor rights and providing certain minimum levels of benefits, and smaller numbers of privately controlled public companies and thriving institutional shareholder activism, are some of the few perceived factors that make developed market companies seem to be better stewards of social and governance factors. It is also worth noting that some of the companies that score highest in ESG ratings are usually technology companies such as Apple, Google and Microsoft, which typically do not have high requirements for manual labor.
Having considered this, we should perhaps now ponder whether it is justified that developed market companies should enjoy this higher ESG score, and thus cheaper capital, compared to their emerging market counterparts. We should consider questions such as: (I) are these ESG criteria designed to support Western values or do they indeed drive better social and governance responsibilities not only for Western citizens but for the global population? (II) Are these ESG criteria a fair assessment given countries that are in different developmental stages, where perhaps in certain emerging market economies, the labor force would prefer the opportunity to earn a wage than be patronized with labor rights protection? (III) Do these ESG criteria penalize emerging markets who require energy intensive industries to reach the next developmental stage, and while developed markets have been polluting the world for over 150 years to drive their own development and yet have not been penalized? (IV) Is the Western model of governance the ultimate standard when there have been spectacular corporate failures such as Lehman Brothers and Enron, each the trigger of a global financial crisis?
ESG is without doubt the future of the corporate world as we must address the imbalance between capital versus labor, and ESG standards will help balance powerful corporates with the appropriate protection afforded to individual workers, especially since the imbalance has been further exacerbated by the pandemic. However, we as responsible finance advocates sitting at the crossroads between emerging China and the West owe it to ourselves to influence and provide input to ESG standards to ensure it doesn’t become another tool for the West to impose its ideology on China by unfairly disadvantaging Chinese companies based on lower ESG scores (and thus higher capital cost) benchmarked against purely Western standards without regard to economic and social realities in China. Further, we must also fight against unscrupulous Western interests in disguising ESG as a protectionist tool by granting developed market companies a higher ESG score on the sole basis of their conformance with Western values, which gives them an unfair advantage in access to capital. This in itself is anti-competitive behavior and should be viewed negatively within the context of ESG.
In a year where we have been upended by war in Europe, high inflation and high interest rates, we must also rebalance our thinking to ensure the current Western hegemony in technology, wealth and capital does not become even more powerful by appropriating ESG as their protectionist tool. We should fight against this by influencing ESG standards such that emerging markets also have a fair chance of development and not fall into the middle income trap because of a lack of capital as constrained by Western centric ESG standards. The time to act is now before ESG standards mature and it will be too late to change then.