ESG – A Global Development Squid Game

Oh how I miss conference cocktails where the great and the good would raise their glasses to each other, celebrate their charitable endeavours and seek redemption on champagne and hors d’œuvres. Mind you the Risk-Monger was never part of this club. He was merely one of the dancing bears brought out to entertain the endowed as they sought erudition and wisdom (with, hopefully, some market insights or political influence). But COVID-19 changed all of that and this select group needed to express their virtue through other endeavours. Getting even richer off of the pandemic meant redemption could only come in a form familiar to them – through shifts in investment strategy.

Two of America’s most influential CEOs (Larry Fink of BlackRock and David Solomon of Goldman Sachs) decided to join in on the green narrative (at least through the sides of their mouths) and via a rather anonymous ratings group, set out a series of ethical and environmental standards that suited their interests while making everyone feel good about themselves. The new investment standards known as ESG (Environment, Social and Corporate Governance) offer a virtuous and righteous halo with every ETF click (with a fee structure that is … well … heavenly) … while their decisions gently rape the developing world, denying them any hope of progress or alleviation of poverty.

An Investment Squid Game

Think of ESG as a sort of investment Squid Game. Companies have to jump through ethical and environmental compliance standards to have their stocks carried in BlackRock or Goldman Sachs ESG ETF funds. (BlackRock manages 30 such ESG ETFs.) If the companies meet these goals, they survive to fight another day (when the rules of the game will have evolved). If their ESG score goes down, their share volumes will decline and the great and the good may get cranky with their management. Given the massive influence of these hedge funds, companies are basing decisions on meeting the often arbitrary ESG scorecards, hoops and hurdles rather than good business sense, societal impact or long-term planning.

Simple example. Governments are trying to manage an energy transition between now and 2030 to cut CO2 emissions while ensuring a reliable and affordable energy supply. But companies have to report to their shareholders (and, more importantly, to Larry Fink and David Solomon) every three months so they have started to massively divest in fossil fuel-based energy sources and projects in order to get ESG points. So a radical decarbonisation transition has been forced immediately upon energy users. If you are wondering why your electricity and gas bills have been shooting up and your energy company is planning a series of rolling blackouts this winter, you can thank the kind-hearted philanthropy of Larry and David. ESG will cause enormous suffering among Europe’s and America’s have-nots, but the shareholders of those companies that managed to secure ESG-friendly power sources can burn inflated money to keep warm.

Good for Stocks, Bad for Development

But what does this ESG Squid Game mean for global development and Africa in particular? Natural gas is the obvious energy source for a quick, secure, low-carbon and relatively cheap energy route in emerging markets. But any company financing, building or in any way connected with a “fossil-fuel energy project” will lose ESG points, face a lower ranking and see their share price tank. Ranking systems do not seem to differentiate between dirty coal and clean gas – both, in being “fossil”, hurt the scorecards (even if the European Commission was forced to acknowledge natural gas as a net-zero source of energy). Africans can sit quietly in the dark for a couple more decades until their emerging industries can access sufficient renewable energy. Thanks Larry.

Companies work well with such scorecard schemes – if you can’t measure it, you can’t manage it – and so the bean-counters are buzzing with ESG ranking lists. But who determines the ESG standards – who decides tomorrow’s game and who lives or dies? MSCI is projected as some faceless voice on a loudspeaker. The focus of ESG is an elimination game – removing perceived environmental/social risks rather than developing impact-driven initiatives for people and the environment. Innovative, impactful solutions are future based while ESG is aimed at absolving past sins today. It plays into what I have referred to as the precautionary poison, where we concentrate our time on removing uncertainties rather than working on new technological developments. The developing world is paying twice for our decisions (loss of future technological opportunities and the environmental consequences from our past opportunism).

Let them eat beans!

Companies used to lead corporate social responsibility (CSR) initiatives that would improve economic and social conditions in developing countries. Sure, a lot of it was fluffy PR but many key development goals guided their actions (from water purification projects to rural development and infrastructure investments). Industry used to make decisions that delivered increased social goods and well-being with progressively improving technologies at economically competitive costs. At least the fluffy PR was not obsessed with maintaining share prices and volumes.

Now corporations have outsourced sustainable development decisions to a couple of self-interested, high and mighty bean counters whose scope of research and social awareness is based on CNN vignettes. ESG, with its obsession on decarbonisation is actually diverting funds and focus from sustainable CSR projects into more Western-driven issues. ESG imposed a premium on lowering exposure to potentially environmentally damaging greenhouse gas activities rather than incentives on positive developments. But what do developing countries really need? Do they need those past industrial practices to be stopped everywhere or would they benefit from emerging technologies and easy and effective delivery of social goods? Should their future be dictated by precautionary divestment strategies imposed by narrow-minded activists on a quarter-by-quarter basis or by long-term vision?

When market forces are distorted, when decisions are based on short-term share movements and when strategy is determined by a series of arbitrary standards, the poor get swept aside while the rich prosper. Pay no attention to those men behind the curtain.

In this global development Squid Game, should we really be letting the rules be determined by such shadowy, masked creatures like Larry Fink and David Solomon?

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