GARY RYNHART: Move ESG beyond box-ticking to reduce inequality

The GDP per capita (average wealth of citizens) of the top 10 nations is not less than $70,000. In the bottom 10 it is not more than $500. This equates to 3-billion people who cannot afford a healthy diet, even if they spend most of their income on food.

According to Our World in Data, one in four people does not have access to safe drinking water. Nearly 1-billion people (13% of the world) do not have access to electricity, and 3-billion (40% of the world) do not have access to clean fuels for cooking. 

The number of people in extreme poverty is about 700-million (equivalent to the populations of SA, Thailand, France, Brazil and the US combined). One in 10 of the world’s population goes to bed hungry each night, and globally one in four lives in societal poverty.   

It is also the poorest who are bearing the brunt of climate change. Some forecasts predict that 1.2-billion people could be displaced globally by 2050 due to climate change and natural disasters. Yet poorer countries are not causing these severe climatic conditions. The lowest-income countries produce a 10th of emissions but are the most heavily affected by climate change. 

Business is not to blame for the shocking levels of inequality that spill out of these numbers but it can be part of the answer. Environmental, social & governance (ESG) requirements have created an unprecedented awareness of corporate social and environmental responsibility. Yet in its current constellation it’s not anywhere close to having the desired effect it could have.   

An increasing number of exchange traded funds (ETFs) explicitly target ESG topics. Yet only about 10% of ESG ETFs are based in developing-country markets. Despite all the hand-wringing about achieving the UN sustainable development goals (SDGs), ESG is mostly a rich world thing. When it comes to ESG country strategic risk, Sweden, Norway and Denmark topped the list of best-performing countries, and this is where investors follow. 

Why are ESG funds largely concentrated in developed countries? When it comes to investing in developing and middle-income countries, the existence of negative structural factors is what deters investment. Ratings agencies compound this perception by rating ESG risks by country. There is also a lack of consistency and standardisation that can leave investors confused about the true risks and rewards.  

ESG investors screen such risks (in developing countries) in much the same way they screen risks in developed countries. That is a real obstacle because there are quite different realities in play. The result is a lack of badly needed investment in these countries, which consequently retards the requisite progress on the SDGs, something the ESG flag wavers say is a priority.

As ESG investors invest in the shares already traded in public markets, investing in an ESG fund does not (mostly) provide additional capital to more sustainable companies or causes. For example, most investments in low-income markets are simply too small for mainstream institutional investors to consider. Small, medium and micro enterprises (SMMEs), which form the backbone of most developing economies, are locked in a “financing trap”, and without access to finance they can’t grow. 

Without clear definitions of what it means to be sustainable, in particular how it helps to actually achieve the SDGs where they really count, ESG will result in box-ticking compliance rather than a gilt-edged opportunity to raise incomes and promote decent work across the Global South. What can be done? 

Investors should accept disclosures that meet local best practice instead of imposing their own standards and they should take the different needs of developing countries into account. The current plans to legislate ratings agencies should include how ESG risk and opportunity in developing economies can be assessed in a more context-driven way. 

Impact investors — different to ESG — can play a bigger role. Their market share is tiny but growing. More institutional support to these investors can increase investment where it is needed most.

Some asset managers have developed in-house ESG ratings systems based on data and metrics from external sources such as the World Bank and IMF. This can really help. The UN Sustainable Stock Exchanges Initiative, for example, has greatly improved ESG disclosure in emerging markets. 

Finally, there is a big role for representative employer and business organisations in developing economies to call out double standards and promote ESG as the tool it could be to promote sustainable investment and decent jobs. 

• Rynhart is senior specialist in employers' activities with the International Labour Organisation, based in SA.