Marzele Bosch (South Africa)
The role of government interventions in promoting sustainable investment
Transitioning to more sustainable practices has become imperative as unequivocal evidence of global warming has surfaced. Sustainable investment has taken center stage worldwide, with assets under management reaching USD 35.3 trillion. Sustainable investment often uses environmental, social, and governance (ESG) factors, alongside financial aspects, to influence decision-making processes. ESG investment aligns with the global sustainable development goals (SDGs)set out by the United Nations in 2015 with the overall objective to ensure peace and prosperity for all. The stock price for ESG- focused companies have stabilized, often outperforming companies with low ESG ratings. The argument here is that ESG investment is suitable for returns because more responsible investment is more profitable. Thus, ESG companies may expect higher returns while making a real-world impact. However, this may be a well-orchestrated Wall Street fairytale. Former chief investment officer of Sustainable Investing at BlackRock claimed that many mutual funds are rebranded as sustainable without changing, and many ESG products covertly contain unstainable companies. Is ESG investment simply a façade?
ESG investing has faced several stumbling blocks, most notably the divergence of ESG ratings by different agencies. These differences have significant consequences. Firstly, it becomes difficult for investors to evaluate the actual ESG performance of a corporation to make sustainable investment decisions. The divergence may also decrease incentives to make meaningful improvements in ESG performances. Studies make use of EMG ratings for empirical research. These divergences may alter the research results, resulting in incorrect conclusions. These erroneous conclusions then inform possible investors of ESG performances. Harmonized ESG ratings and metrics are necessary for the future of sustainable investment. Presently, vague and ambiguous definitions, flexible interpretations, conflicting ESG indicators, and dishonest data undermine the effects of sustainable investment. ESG-focused investment is already facing significant backlash. The anti-ESG movement has progressed from rhetoric to reality.
In the USA several red states in the USA have banned doing business with companies that consider ESG factors when making business decisions. Strive Asset Management launched its first exchange-traded fund (ETF), named DRLL, designed to urge more drilling in the oil and gas sector. Its success proves that there is a substantial market of investors who call on energy companies to evaluate investments exclusively on financial measures, regardless of other social, political, cultural, or environmental goals. This may be a response to several criticisms against ESG-compliant companies. These include accusations of greenwashing, misleading statistics, and companies’ developing sustainable policies without actual action. It becomes clear that companies’ commitments to ESG investment and sustainability are flawed. Perhaps it is time for the responsibility of sustainable investment to move from the private sector to the public sector. Private companies are not necessarily committed to making the world a better place but rather to assessing long-term risks from environmental and social perspectives, and ensuring the company is safe from future repercussions.
Free market economies are skeptical of government interference in business affairs. However, during the COVID-19 pandemic, governments worldwide played a significant role in flatting the curve by imposing certain restrictions. It may be beneficial to apply the same restrictions to companies that continue to be unsustainable. Government regulation and an international regulatory framework may be needed to promote companies’ commitments to sustainability and establish consequences for companies that continue to be harmful based on an environmental, social, and cultural level. The world is not on track to meet the SDGs by 2030. While the objectives of the SDGs are clear, it lacks clear policy recommendations and strategies to reach these objectives. Thus far, the burden has been placed on the private sector and non-governmental organizations to promote sustainability. A global policy framework and government intervention may incentivize sustainable development while discouraging unsustainable practices.