GARY RYNHART: ESG investors can facilitate change by engaging SMEs

Environmental, social & governance (ESG) investing is on the lips of every investor and financial services executive. It has become a huge industry with ubiquitous glossy sustainability reports and conferences. 

Many of these have syrupy titles such as “Because a different world is possible” with inspiring background music from Beyoncé. But how much of it is truly impactful? I have my doubts.

The process of getting to the point where ESG represents one in every four investment dollars, started with the globalisation of the 1990s that facilitated the growth of global supply chains. Mobile capital followed quick economic returns. However, a nascent internet brought greater scrutiny for global firms.

The original canary in the coal mine was Nike, which took a lot of heat in the 1990s as sweatshop claims massacred garment and apparel brands. Nike had to act, and this led to the emergence of social and later environmental audits to support compliance and rights issues. Compliance structures are now present across all sectors, from mining to electronics.

This period into the 2000s ushered in a golden age of wealth creation and the largest drop in global poverty in history. However, by widening global economic inclusion it also deepened inequality in rich countries, and that threatened middle classes and drove populist politics.

This is why in 2019 180 multinationals, including Walmart and JPMorgan Chase (The Business Roundtable), felt they had to say they stood for “a wider contributory role from businesses to workers, their families and to communities”. Twenty years earlier their mission statement read: “The paramount duty of management and of boards of directors is to the corporations’ stockholders.” Inequality, resentment and social unrest suggested otherwise.

The key factor driving the new Global Roundtable position is self-interest (which is fine by me).

Nowadays, more than 2,250 money managers, who collectively oversee $80-trillion in assets, have signed on to the UN-backed principles for responsible investment.

Issues with ESG investing that engender cynicism include contradictory behaviour and cartelism. BlackRock, the big dog of the ESG set, was recently accused of inconsistency due to its investments in a company that has allegedly engaged in land grabs, in addition to adhering to poor environmental standards. This comes after BlackRock led “an investor rebellion” at P&G over concerns P&G was not living up to its environmental obligations.

Largely ignored

A defence company, for example, that specialises in missile production and scores high on environmental sustainability, employee treatment, corporate governance and diversity may merit inclusion in an ESG fund. Then there is the superficial rebranding of exchange traded funds (ETFs) as new “Sustainable ETFs”. No-one is really keeping score on any of this.

Regarding cartelism, most investment dollars are sloshing around the same large players. Indeed, the big four accounting firms have expanded hugely in this space eyeing more jam. Yet small and medium-sized enterprises (SMEs), the backbone of every economy, are largely ignored. Sure, there are some boutique investors targeting SMEs, but it is mostly small beer.

It is a difficult space. Most SMEs will find the barriers to ESG engagement too high. By some estimates compliance by SMEs in emerging markets can cost about $400,000 (R5.6m) per firm, largely due to increased spending on labour and capital. Nor are these one-time expenses. SMEs need to spend money over time to maintain and document their compliance. Even voluntary certification standards cost money to achieve and maintain — consider the audits needed to document ongoing compliance.

But stand back from the whole debate and look at SA’s pressing problems: a new global record last month as unemployment figures became the world’s highest; another SA record for inequality was certainly a contributing factor to the looting and disturbances in July. The risk to business’ social licence to operate, with democracy itself, is present in these figures.

SMEs in this country are where development needs can be addressed and real progress is possible on reducing unemployment and poverty. Yet ESG investors now ignore them to invest in … Facebook! As Stats SA reported last week, they need it. Fixed investment, vital to drive enterprise growth, is at its lowest level in four decades.

A different approach is possible but the ESG crowd have to start by stopping talking to themselves and engage with a wider set of stakeholders. Then maybe a better world is possible.

• Rynhart is a specialist in employers’ activities with the International Labour Organisation, based in SA. He is author of ‘Colouring the Future: Why the UN Plan to End Poverty and Wars is Working’.