- the strategic imperative for economic development and sustainability
There are two divergent opinions suggesting ESG performance is the necessary impetus for economic growth and transformation on one hand, and economic growth being responsible for ESG performance on the other hand. I speak for ESG performance being responsible for economic growth in this series.
From a public perspective, every country in the world is looking for ways to revitalise their economy, and address multiple challenges which look social, political and economic in character. Until recent times, several countries had shown relative concern about how they ought to deal with the global challenge of climate change effects on economies. This concern has however seen more individuals, businesses and governments having to shift emphasis to a global phenomenon of sustainable business and economic development discussions, a concept that provides a wider framework for economic impacts and prosperity.
As outlined in the United Nations Sustainable Development Goals, the potential for economic growth from socio-economic dimensions calls for sound economic policies, deepened good governance protocols, and political commitment to seeing things happen. Obviously, the rapid advancement of some economies and their growing scale and complexity; new challenges for government and industry in promoting long-term sustainable growth – particularly for decent work, responsible production and consumption; reduced inequalities and digitalisation are all causes for which sustainable development principles ought to be the guiding light for economic emancipation.
That said, there is no sustainable economic development without good governance. As observed, good governance is fundamentally critical to public administration and business management practices. It seeks to establish and maintain an environment that promotes robust and equitable growth of the business, economy, while also serving as a necessary component of effective economic policy direction. Furthermore, good governance principles define commitment to democratic ideals, norms, practices, trustworthy services, honest business approaches and procedures to drive institutional support – the political and socio-economic connections and efforts needed to bring about sustainable development and transformation.
Today, a developed economy encompasses the rapid growth of information and communication technologies, sustainable industries, equal job opportunities for all, and good governance. Local economic development – which involves the allocation of limited resources like land, labour, capital and entrepreneurship in a way that positively affects the level of business activity, employment, income distribution patterns and fiscal solvency – cannot thrive without good governance. It is a process of deliberate intervention in the normal economic growth paradigm by making it easier or more attractive for collaborative participation. The pursuance of good governance can lead a country out of crisis and onto a path of sustainable development, and establish plans and objectives which span large-scale economic prosperity.
What is Good Governance?
Government’s tasks are increasingly regarded as more general, generic, economic and social concerns which political institutions and other players ought to manage. Here, the notion of governance envisions a move away from the well-established concept of a top-down government approach to resolving societal challenges as already defined. Thus, good governance can enhance evaluations of life directly, because individuals are happier living in a setting of excellent government; or an approach to governance that allows people to attain greater levels of something relevant to their well-being.
However, sustainable growth and development in any economy has always thrived on good governance and effective leadership. Essentially, governance exerts a form of authority to preserve order and address demands of the general population within a set of parameters. Therefore, the collection of all methods through which individuals and institutions, both public and private, ought to deploy in managing shared concerns of the people is highly regarded good governance.
With good governance principles, the capacity of government to provide predictability in policy and institutional environments is imperative. Good governance leads to efficiency in the prioritisation of government services to align with standardised requirements to meet the general good of citizens. Accountability, which ensures that each individual remains responsible for their actions, equally underscores how responsibilities and duties associated with certain institutions to promote and foster gender quality, expression of personal freedom, and offers instruments to alleviate poverty, deprivation and fear, and create a safe atmosphere for productivity devoid of violence as well as protecting the environment are what good governance seeks to champion.
The continual process of balancing competing or divergent interests and taking coordinated action encompasses both official organisations and regimes with authority to compel compliance and informal agreements that individuals and institutions have agreed to, or believe are in their best interests, speaks to good governance. It is a process rather than a collection of rules or activity; a process of governance that is based on cooperation rather than control, and incorporates both the private and public sectors – not being a formal institution but an ongoing interaction.
Economic Development
Economic development requires a concerted effort on the part of a responsible governing body in a city or country to influence the direction of private sector investment toward opportunities which can lead to sustained economic growth. It is important to know that economic development is not community development. Economic development is purely and simply the creation of wealth in which community benefits are created. Economic development means different things to different people. On a broad scale, anything a community does to foster and create a healthy economy can fall under the auspices of economic development.
Arguably, each community has its own opportunities, challenges and priorities. An economic development planning process must include the people who live and work in that community; and though priorities of economic development may vary, their strategies must aim at targetting common positive results: such as creating more jobs and more job variety; keeping businesses and getting new ones; a better quality of life; more people and businesses paying taxes; more productive use of property; promoting a community’s assets; making and selling more local products; and getting more skilled workers living in the community.
Moreover, sustained economic development needs strong partnerships and development activities to make it actually sustainable. Partnerships will help to leverage resources, build capacity and encourage collaboration. A sustained economy is characterised by sufficient incomes for the local labour force, profitable business opportunities for employers and tax revenues for maintaining infrastructure to support continuous growth, business retention, expansion and creation of wealth.
How ESG impacts Sustainable Economic Growth
ESG-investing is part of the growing awareness of sustainable development. Recently, investors, lenders and other stakeholders around the world have increasingly incorporated environmental, social and governance factors into their business decisions. To integrate ESG aspects into decisions, stakeholders must be able to accurately capture ESG-related information disclosed by companies.
It is the consideration of extra-financial information to enable better decisions that – if done properly – should lead to sustainable economic growth. From an investment perspective, incorporating ESG analysis alongside traditional financial factors adds to holistic understanding of risk, opportunities and long-term value outcomes.
As a result, for most business leaders ESG has become a top priority. This is not because of a deep-rooted ethical or moral stance as some critics of ESG like to claim, although this should always be an important consideration. Rather, it is because ESG risks are now among the largest threats facing businesses; and they could have a significant impact on their long-term performance and profitability, including their ability to raise new capital and impact growth of economy.
Across the same tangent, an increase of firms’ ESG performance is associated with a positive, statistically significant effect on living standards in a country. As research has proven, a firms’ average social performance has a statistically significant positive effect on growth in GDP per capita in both developed and emerging economies.
This however drives home the assertion that rapid acceleration of the sustainable-transition journey to embrace an ESG framework points to economic emancipation and transformation, because there is every indication that ESG disclosure is a way forward in market-oriented policy and regulatory instruments of change for the economic good.
The Need for and Implications of ESG Disclosure
The main benefit of corporate disclosure is to mitigate information asymmetries between the company and its investors; as well as between investors, on the one hand, and companies on the other. The roles played by Sustainable Information Disclosure are more or less known, as it is designed to support the transition to a sustainable economy and a fairer society.
The positive effects can be summarised as: By mitigating adverse selection, disclosure encourages pro-ESG investors to continue their sustainable strategies. Disclosure may increase investor awareness or willingness to hold securities with high ESG ratings. With this, there would be an increase in the number of pro-ESG investors, which may necessarily improve risk-sharing in the economy.
The increase in rate of economic growth from ESG framework activities implies an increase in the country’s capacity to achieve and sustain high investment rates, leading to technological advancement that creates innovation. Again, rising levels of employment and income raises funds from which effective ESG policies are financed; so a better standard of living generated by economic growth that changes lifestyles, and the greater attention people give to environmental amenities, social challenges and governance are all by-products and benefits which may accrue from the concerted efforts of organisations and governments to remain committed in the ESG disclosure call.
As already put forward, the more ESG initiatives take advantage of what the country has to offer, the more efficient and effective its socio-economic outlook will be. Commitment to the ideals of ESG leads to economic development and its relative impacts on increases in individual resources, reduction in dependency on families, and a means to cultivate individual uniqueness and responsibility.
To that effect, ESG compliance remains a strategic economic tool, imperatively significant to spurring socio-economic development and transformation of the country.
Frank is the CEO and Strategic Partner of AQUABEV Investment and Discovery Consulting Group. He is an Executive Director and the Lead Coach in Leadership Development and best Business Management practices for Discovery Leadership Masterclass.
