Over the past few weeks, I have focused on advocating for environmental social governance (ESG) as a vehicle to address critical development and economic issues in both developed and developing countries. In this article, focus is on the increasing correlation between investing, economic performance and environmental social governance, and its implications for future generations. For us in the developing world, ESG has become critical in everyday decision-making, especially regarding daily activities that impact negatively on the environment and other natural resources as people try to make a living from the environment.
Generally, there is a broad convergence around the general meaning of ‘sustainability’ and ‘sustainable’. The terms refer to the idea that future generations will be able to enjoy the same resources and natural wealth as the present one, in a more equal, inclusive and enduring fashion. Though the application of these concepts to specific economic and investment decisions is unclear, it is generally agreed that ‘sustainability’ and ‘sustainable’ can be defined by the extent to which decision-makers and investors factor the future into their planning and activities.
From the economic perspective, ESG has become an umbrella-term to describe investment strategies, instruments or activities that incorporate environmental, social and governance issues. For investment practitioners and market participants, the term aims to articulate the role of relevant environmental, social or governance objectives in their investment decisions, and in the context of their investment beliefs and objectives.
The growing awareness of global environmental and social issues has brought about a more holistic understanding of the ESG issues’ relevance beyond socially responsible investment (SRI). SRI refers to investment approaches that take into consideration the investor’s conviction on certain social values or beliefs, and which usually exclude certain investments based on their potential impact on the environment.
The past few decades have seen a dramatic expansion of ESG-related investment instruments, along with markets to accommodate such a variety of ESG approaches. In this context, integrating ESG issues to enhance understanding of the risk-adjusted investments and returns has become the norm.
Thus, investors undertaking impact investing, ESG integration and responsible ownership approaches are becoming increasingly proactive in seeking to understand the implications of their ESG strategies, the real economy, the wider society and environmental ecosystems. It is becoming clear that ESG performance is beginning to influence investors’ choice and the ability of countries to attract investments or sovereign bonds.
Consequently, institutional investors committed to responsible investments are asking a number of key questions:
- How should sustainability be understood in the context of ESG investments?
- How can economic and financial objectives be reconciled with sustainability on a consistent and systematic basis across investments and asset classes?
- What are the direct and indirect relationships between long-term performance of sovereign bonds and the issuer’s sustainable development agenda?
Investments and ESG
In a 2020 report titled ‘Engaging with Investors on Environmental, Social and Governance Issues’, the World Bank noted investors reported that ESG decisions could help them understand a country’s macroeconomic performance. This was especially true of governance issues (e.g., strength of institutions, political stability), since these factors are often understood to have a direct effect on a sovereign’s ability to successfully implement national sustainable development policies, which will ultimately influence market perspective on the country’s macroeconomic performance.
According to the World Bank, the advent of ESG provides a more structured, organisedand in-depth framework to integrate environmental governance into sovereign credit analysis and general economic performance. Furthermore, given the growing awareness of interconnections between sustainable development and environmental and social issues locally and globally, it has become important for all investors in sovereign credit to devote appropriate resources and time to understanding the inter-relationships. It understood that familiarity with environmental and social issues at the local level, combined with insights into public governance, may help investors understand the prospects for implementing such plans. Environmental and social sustainability is crucial for enabling long-term economic growth and macro-stability.
At the corporate level, mining conglomerates like Newmont see ESG-reporting as a business imperative that is tailored to respond to the expectations of investors, host governments, communities and employees. Globally, ESG implementation has shifted from “do no harm” to include actions that address global challenges. Addressing these challenges requires a commitment to “not only protect the health and safety of employees and business partners, but also support community health and safety needs, respect human rights, conduct business with integrity, and create equitable and diverse workplaces”, says Newmont in its 2022 Sustainability Report.
Below is a summary of key factors guiding ESG policies.
Under the environmental theme, focus is on the following:
Climate adaptation strategy, such as exposure to and preparedness for natural disasters (physical risk); climate transition (dependence on fossil fuels); energy efficiency and security; air-pollution, water pollution and their management; food security; protection of natural resources (biodiversity, deforestation); and waste generation and recycling. Environmental issues can be separated into the following categories: (i) the impact of climate change; (ii) water scarcity and usage; (iii) use and export of natural resources; (iv) pollution; and (v) energy and greenhouse gas generation. These issues are incorporated in the credit assessment based on impacts they can have on both a government’s revenues and its expenses (e.g., destruction of infrastructure due to natural disasters).
These environmental concerns have become critical to the health of every economy, especially air and water pollution, food security, and waste generation and recycling. Not only do these issues negatively impact the livelihoods of current generations, but they also affect generations yet unborn. Thus, the linking of environmental preservation to investor decisions should be enforceable by governments and multinational corporations that are operating in poor countries. For multinational corporations to get new investments and gain appreciation in their shares, they must accurately report activities that promote environmental sustainability.
But it is one thing reporting and another doing the right thing. There have been instances when corporations have deliberately failed to report the impacts of their operations on the environment, or have misreported them. But now events around ESG reporting are improving due to the technical support provided by other stakeholders. For instance, in Ghana, Microsoft is providing technological support on ESG reporting while Alliance Insurance is providing insurance guidelines and policy support. These two companies are collaborating with Hanson Global UK and Ghana Ltd., a Microsoft Partner headed by Thomas Cook Jefferson Dankwah.
The issues comprise demographics (e.g., working-age population), social and income inequality, human rights, freedom of speech and opinion, health care, education and outcomes (e.g., access to schooling), human capital development and the labour market, and gender equality and discrimination. Though some of these issues are aspirational, governments are enjoined to focus on some of them – such as education and health outcomes that are used to measure social performance and human development. In terms of education, health and social development, Ghana has been cited as making progress. The success of universal basic education and the ongoing free secondary education policy have improved access and quality of basic education in Ghana. However, the area of water and sanitation needs further investment. Government must invest in waste management and recycling if we are to improve our environmental and social governance scores in the coming years.
Issues under governance include government effectiveness and transparency, rule of law and corruption, regulatory quality, macroeconomic policy stability, ease of doing business, trade openness, enforcement of legal rights, peace and stability, judicial independence and effectiveness, and the regulatory framework and contract enforcement process. Ghana is generally adjudged to be doing well in Africa – often being cited for upholding the rule of law and building strong institutions. Ghana’s democratic, governance and electoral processes are great case-studies across the world.
Ghana has held successful general elections and transitions since 1992 without military interference, and is seen as the oasis of peace in an unstable sub-region. The country is also cited as providing a congenial environment for trade and business. However, the economy has suffered a series of macroeconomic disruptions since 2014. Between 2017 and 2019, the economy enjoyed macroeconomic stability prior to the onslaught of COVID-19. Currently, the high inflation rate and rapid depreciation of the cedi have negatively affected economic performance and the cost of living and human development.
Focus on SDGs
A focus on policy documents like the SDGs is important for institutional investors seeking to understand how ESG considerations can enhance their risk assessment and support their ESG engagement strategies.
The Sustainable Development Goals adopted in 2015 are an historic global achievement. These 17 targets, in areas such as health, gender, jobs and poverty reduction, are part of a comprehensive global agenda to end poverty in a single generation. Nearly 800 million people now live in extreme poverty – earning US$1.90 per day or less. For the first time the world has set a deadline for ending extreme poverty – by 2030, which is seven years away.
This raises the question of whether global leaders can achieve these goals. Among the 17 SDGs, ending extreme poverty is goal number-one. This makes a pressing case for the global community, especially developed countries and multinational corporations, to commit to ending poverty across the world. The SDGs provide a useful framework for understanding the different dimensions within which efforts to achieve sustainability should take place. However, there appears to be a lack of national and global commitment to working toward these goals.
World Bank. 2020. Engaging with Investors on Environmental, Social, and Governance Issues: A World Bank Guide For Sovereign Debt Managers