What is the most important letter in the ESG acronym?
Editor's note: Djoomart Otorbaev is the former Prime Minister of the Kyrgyz Republic, a distinguished professor of the Belt and Road School of Beijing Normal University, and a member of Nizami Ganjavi International Center. The article reflects the author's views and not necessarily those of CGTN.
In the previous piece, I have noted that the corporate world has been paying particular attention to investing with ESG principles in mind. When analyzing the activities of corporations, investors, while expanding their portfolios, consider not only the figures of their sales and profits but also pay attention to environmental (E), social (S) and corporate governance criteria (G). More and more companies are demonstrating their commitment to the principles of ESG and are implementing sustainability criteria in their activities. Interest in this area is actively growing from the investment community to much broader stakeholder groups, including governments and civil society.
If one carefully considers the UN Sustainable Development Goals (SDGs), a clear correlation and interdependence between environmental (E) and social (S) requirements become apparent. However, if one takes a closer look, it is easy to see that investors are paying more attention to climate change. This fact is understandable since all of us, including the corporate world, must do our part to help the world achieve the goal of keeping the temperature rise on Earth by no more than 1.5 degrees as stipulated in the Paris climate agreement. On the other hand, investors should not consider environmental liabilities (E) in isolation. Climate change also poses an immediate threat to the health, food supply, biodiversity, and livelihoods worldwide. Corporations also must properly account for what they do regarding the impact on society (S).
The current traditional approach "S" focuses on worker rights, equal opportunity or equal pay for men and women. But social factors must consider much deeper factors. Understanding social issues is not a tick-box exercise. Social impact means that investors are mindful of their capital's impact on society when investing. Therefore ESG industry needs to improve the measurement of social outcomes dramatically. It is about direct and active funding to companies and organizations that work towards positive, measurable changes in society along with their financial returns.
But can we correctly measure social impact? It turns out that yet we can't. The 2019 ESG Global Survey by BNP Paribas found that 46 percent of investors surveyed (covering 347 organizations) find the letter "S" the most difficult to analyze and implement into their investment strategies. According to the report, investors are well aware of the meaning of "E" and "G" parameters. Understanding and measuring the social component "S" is problematic for various reasons. A report stated: "A lack of consensus in the industry surrounding what constitutes the 'S' makes it harder to incorporate into investment strategies compared to both the 'E' and 'G'.”
It appears that most significant efforts are being made in China to account for social factors. Since the government's priority is to create a socially harmonious state. "International ESG frameworks have many excellent indicators that we can learn from, but there is no clear understanding of the Chinese ESG requirements," said Wang Yao, director-general of the International Institute of Green Finance at the Central University of Finance and Economics. Wang's team has created their ESG risk database for Chinese listed companies. For example, a position combating poverty was added, which is not yet part of the international social indicators "S" but is critically essential for the country.
I think this is the right approach. After all, poverty means the lack of access to education, health care, employment, or the opportunity to engage in economic activity. Thus, corporations should educate people, create opportunities, and drive systemic change in communities. They should direct their resources on building resilience – training, capacity building, etc., not just playing philanthropy.
For example, many companies participate in disaster relief programs that are critical after hurricanes or earthquakes. But what in those cases would matter is that programs created in partnership with governments should help communities predict and better prepare for future disasters correctly. As the well-known expression says: "Give a man a fish, and you feed him for a day; Teach a man to fish, and you feed him for a lifetime."
An equally important task about social responsibility is reducing social inequality. Many agree that one of the reasons why there has been a lot of discussion about income inequality in recent years is new developments in the wealthiest countries. For example, the U.S. and the UK, got Donald Trump and Brexit phenomena. Or the example of France, where inequality constantly leads to mass demonstrations such as yellow vests. In retrospect, the global financial crisis has brought attention to the risky practices of the Western world's financial elite, motivating enduring movements such as Occupy Wall Street.
It is essential to have wealth that goes beyond dollars and pounds. Wealth should primarily include intangible assets such as educational opportunities, unique skills and talents, emotional and mental health, relationships and networks, and access to cultural assets such as books, art, and museums, which increase the standard of living and create social capital of the individual. Wealth is the tangible and intangible assets that give you the freedom and ability to live the life you want.
Investors should re-evaluate their current ESG criteria priorities. Every company must do its part to reduce its environmental impact. However, namely social commitment can be the key to improving people's lives and building a more just world. If we fail at this and miss or undervalue "S" in ESG, we will fail in all ESGs.
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