Finance has always been geared towards the highest returns with the lowest risk possible; resulting in the funnelling of funds towards harmful activities such as oil & gas extraction, or inflating property prices. However, the way we estimate risk, and value investments in general, is changing. The use of ESG (environmental, social & governance) metrics in risk assessments came as a first encouraging move. Now, lively conversations about environmental devastation and human rights abuses are pushing financiers to look beyond companies’ profit & loss statements. Various ESG Indices have been popping up in the past few years, helping investors direct funds towards companies which are promoting both environmental conservation and human wellbeing. However, we must be vigilant about the leniency of ESG measurements and ask ourselves whether ESG companies truly are forces for good.
There is a wide variety of indices which offer promising alternatives to lucrative yet harmful investments. For example, some indices have fossil fuel free pledges, excluding all companies directly or indirectly involved in fossil fuels, or those which finance the sector. There are also indices which award high ratings to companies which are opting for improved eco-efficiency within their supply chain management. This can come in the form of reducing the use of materials, energy or water. These are welcome steps towards harnessing the potential of finance; helping us allocate capital towards activities and projects which create fair & stable job opportunities whilst protecting natural capital.
Although we welcome impact measurement and pledges for improved sustainability, ESG should be about “doing more good”, not an end in itself. In many cases, ESG has been a form of greenwashing; manipulated as a way for companies to tick boxes and attract more investment. After all, the principles of ESG in the extractive industries seem non-existent. Where do displacement of indigenous peoples sit in the ESG framework? How do you rank corporations responsible for exposing Nigerian miners to uranium burns? Simply put, these indices cannot become a method for legitimising human rights violations and environmental destruction. ESG has the potential to reduce the damage of rogue multinational corporations, however its shortcomings are already evident.
All we have to do is look to the top ESG rated companies from the FTSE 100. Glencore, the mining & commodities corporation, ranks at #4. This is a company which has been under fierce scrutiny for bribery allegations in the Democratic Republic of Congo, and has been accused of human rights violations over a toxic spill in Chad which caused severe burns and illness amongst villagers. Coca Cola HBC (the Switzerland-based bottler of Coca-Cola products) trails behind in #5 place. Coca Cola’s aggressive marketing campaigns have had terrible consequences for rates of childhood obesity in the Western world, and its continued attempts to target young people demonstrate a lack of concern for social values. The limits of ESG indices could not be better illustrated by the fact that these top spots are filled by a global mining corporation with a poor record on human rights violations, and a partner of the world’s largest plastic polluter which is also holds a lot of responsibility for soaring obesity rates. Even Shell and Exxon are self-promoting under the guise of ESG leaders. These are companies which covered up internal reports from the 80s demonstrating the catastrophic effects of their activities, then going on to lobby against climate action. We need to raise the bar. As long as corporations responsible for ecocide and pressing social issues sit at the top of ESG indices, it seems difficult to take the ESG conversation seriously.
If investors are truly interested in supporting a Regenerative economy, it is important to realise the flawed nature of some ESG indices and search for solutions beyond the half-hearted, “do less harm” rhetoric. Ralph Thurm, Co-Founder of r3.0 (an organisation promoting a regenerative economy), writes in great detail about the “cognitive dissonance in the ESG echo chamber” and its “irrevocable damage to sustainability”. In his writings, he proposes sustainability judgements backed by context-specific information, pursuing a multicapital-based approach which incorporates a proper assessment of “System Value Creation”. Alternative, stricter ESG standards hold a lot of potential for redirecting investment towards activities which seek to regenerate broken communities, restore ravaged ecosystems, and safeguard precarious livelihoods.
Here at Positive we support r3.0’s recommendations for achieving effective investment. ESG metrics can learn from the 5 Ps of the Positive Compass: Planet, People, Partners, and Places, with Purpose at the core. The Compass presents guidance for a qualitative approach to making investment decisions. Purpose holds the most value in this regard; if investors have no genuine interest in enriching communities and creating social value, then ESG will only be viewed as a restriction on profit-seeking activities. No matter the opportunity, People will always be integral to its success. Hence, it is crucial we prioritise creating stable and strong livelihoods. Place and Planet can offer direction towards understanding local issues both environmental and social. This way we can tackle the most pressing challenges with targeted investment. Partners can reimagine the relationship between investors and business; moving from one based on debt and returns, towards one based on the creation of shared value and prosperity.