Reconciling Economics with Social Development: The ESG Trend
By: Paakhi Bhatnagar, Research Leader for Russia and Central Asia for Econogy Project
In the early 1970s, Milton Friedman hailed the capitalist, market economy as the primary driving factor for economic growth. Repudiating the Keynesian claim for a ‘big government’ and social spending, Friedman placed his faith on the market forces to raise demand and bring about equilibrium – and growth – in the economy, thus giving birth to the neoliberal regime. It is this strand of neoliberalism that prevails within the industrial framework of rising corporations, economic globalization, and increasing mobility of capital across borders.
If the COVID-19 pandemic has taught us anything about our current market economy, it is the failure of the neoliberal regime in accounting for social growth alongside economic development. The need for a criterion that regulates the social impact of industries has become increasingly important.
Thus, steps in the United Nations Sustainable Development Goals. This list of 17 developmental goals to be achieved by 2030 set a precedent for all economic actors to start thinking about the social impact of their economic activities. The environmental, social, and governance criteria (ESG) has helped facilitate the connection between businesses, which have been traditionally alienated from socio-political processes, and the wider society for which they cater to. The ESG framework compliments the Sustainable Developmental Goals and gives firms a coherent criterion to measure and curb their externalities in tandem with profit-maximizing goals. This has gained traction, not only in social movements and international organizations, but also within businesses that seek to sustain their long-term profits by gauging their carbon footprint.
With the recent outbreak of the omicron variant, it is clear that the COVID-19 pandemic is far from over. Its economic impact, too, is here to stay. In light of this, it’s important for governments all across the globe to acknowledge and learn from the last two years of the pandemic.
An important lesson that the pandemic (and several economic crises before this) has taught us is that the market is incredibly volatile. One of the strongest impacts of investing in ESG is the foundation of a resilient financial market and an added contribution to sustainable development. In fact, ESG has become one of the most important criteria that investors look at whilst analyzing the strategy and output of a firm. A survey by Investopedia has shown that 58% of its respondents developed a stronger interest in ESG after 2020 and nearly a fifth of them started incorporating ESG into their investment portfolios.
During my time as an intern shadowing a corporate lawyer in Dubai, I was able to witness firsthand the importance attributed to ESG within the Dubai International Financial Center (DIFC). Many clients of the law firm, including HSBC and real estate developer, DP World, had started embedding environmental regulations into their policies in order to make DIFC a sustainable financial hub in the region. The result was better credit ratings, highlighted by the Dubai Financial Markets ESG guide, as credit rating companies like Fitch Ratings, are increasingly looking at non-financial performances of companies in order to evaluate credit risks.
Besides environmental consciousness, the social and governance criterion also has implications on the long-term sustenance and profitability of a business. A transparent governance system makes it easier for investors and stakeholders to analyze financial risk and to trace a firm’s commitment to diversity and inclusion policies. Within the UK, diversity and inclusion policies and corporate social responsibility (CSR) is an important platform where corporations can demonstrate their social commitments to wider stakeholders.
While globalization has allowed firms to outsource labour, many of these firms – including Nike and Apple – have come into public scrutiny for mistreating supply chain workers. Post-COVID, corporations across the globe are making changes to their business processes and incorporating more flexibility for their employees. Executives are anticipating less business travel and an increase in the use of digital technology to curb carbon emissions. In fact, assessing business culture and employee satisfaction have become an important aspect of a company’s portfolio. Adhering to social guidelines and producing a transparent report can allow investors to create a moral portfolio and invest in not only business, but also global development.
Debates on whether neoliberal economics has exacerbated inequality and global warming are yet to culminate. However, it is becoming increasingly clear that the ESG initiative has created a reconciliation between business and societal interests. It is, perhaps, through ESG that corporations can play a leading role within the social infrastructure of globalized economics.