It’s been a bumpy ride for environmental, social, and governance, or ESG, investing in recent months — from investigations into major financial institutions to new research to a groundswell of questions about authenticity, veracity, and comparability.
The U.N. Environment Programme Finance Initiative helped to create ESG in the early 2000s in part to convince the mainstream finance industry to think differently about ESG factors and see that they have an impact on long-term investments. There is a belief among some development experts that if these issues are part of the investment equation, it can pave the way for attracting more private capital to address global challenges.
While most ESG money currently goes to Europe and North America, the growth in popularity has opened a door to potential interest in other markets, and Jacqueline Novogratz, the CEO at Acumen, an impact investing nonprofit focused on marginalized communities and low-income countries, tells me that she is having conversations regularly with big investors that she would not have expected a decade ago.
“We've bifurcated our entire system between the private sector that seeks to maximize shareholder returns and then either government or charity, which isn't building the kind of economic machines that can really take advantage of entrepreneurs and capitalism and in ways that allow low-income people to have much more control over their own lives and destinies,” she says. “And that's the area that we have a chance right now to build.”
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But building a system that bridges the gap between ESG or mainstream investments and low-income people and projects that have significant impact, is only further complicated by the current state of ESG.
The Economist recently described ESG investing as “an unholy mess that needs to be ruthlessly streamlined.” If ESG can be clearly defined, measured, and reported, those investments could drive money toward better performing companies and away from those which pollute, pay bribes, or mistreat workers. But if it is weak and ineffective, those potential development benefits won’t be realized.
• The challenges: As ESG gets more popular, asset managers are using the label more liberally. There are concerns that investment managers are “greenwashing” products to make them more attractive. Goldman Sachs and Deutsche Bank are being investigated for ESG claims they have made, and some think that fund managers are increasing their ESG product offerings by relabeling investments in a ploy to charge higher fees. Novogratz says repackaging existing investments as ESG is “super problematic.”
• The evidence: For years one of the selling points has been that companies with good ESG practices outperform — at least in the long term — companies that do not. A recent study poked holes in that argument and another found that some so-called ESG funds did not outperform traditional funds on key sustainability factors. Harvard Business Review says this could be due to a number of factors: that some fund managers may have tried to hide bad performance behind an ESG label and that setting ESG targets may distort decision making.
• The way forward? One of the problems is defining what counts as ESG, and a number of solutions are on the table. The International Sustainability Standards Board is creating a set of global guidelines on corporate sustainability disclosures that will help build a global set of metrics. Some in the development industry tell me they’d prefer that ISSB focus on “double materiality,” which measures not just the factors relevant to a company’s financial performance but also their broader impact on the environment and society. Some regulatory reforms are also on the table. The U.S. Securities and Exchange Committee is currently consulting on a rule that would require reporting on corporate climate impact, and recently extended the comment period. With more regulation will come “more rigor and discipline” in how ESG is calculated and the abilities for better comparison across companies and financial institutions, Novogratz says.
Flick your BICS
The New Development Bank is working to issue a new U.S. dollar bond before the end of the year as it seeks to limit concerns about the institution following a Fitch Ratings downgrade last month driven by concerns about its ties to Russia.
The funding from the new bond will be restricted so that it cannot be used in Russia and “will be devoted to finance sustainable infrastructure in all the other member countries of the bank,” Leslie Maasdorp, NDB’s chief financial officer, tells my colleague Shabtai Gold.
The issuance could be a test of whether NDB can raise money in U.S. dollar markets and if it has assured its investor base to lend to a bank with a 20% Russian ownership stake, Shabtai writes. The key question: Will it be enough to convince investors that it has set aside the R in BRICS?
Exclusive: BRICS-led bank plans US dollar bond to downplay Russia ties
ICYMI: BRICS-led development bank takes credit ratings hit over Russia links
Debt download
Do you want to understand the current debt crisis and why it’s getting worse? Sri Lanka has defaulted, the number of countries in debt distress is growing — and the international community is seemingly reluctant to take action, experts tell us. Shabtai has the breakdown and also a look back at how things got so bad.
Read: How the debt crisis imperils development — and why it's getting worse (Pro)
+ Devex Pro members can also read Shabtai’s deep dive into how the debt crisis got so bad and how to make it better. Not gone Pro yet? Start your 15-day free trial.
Replenish-meant to be?
The World Health Organization — an agency that often struggles to raise the money it needs to address health challenges — is looking at whether a replenishment model could help it create more funding sustainability.
My colleague Jenny Lei Ravelo spoke to several experts about the feasibility for WHO and what lessons the organization can take from other organizations that rely on replenishments.
Read: What WHO can learn from different replenishment models (Pro)
What we’re reading
The United Nations Development Program has collaborated with energy companies causing pollution in the Amazon. [The New York Times]
With bond markets unavailable to them, low-income countries are gambling on risky bank loans. [The Wall Street Journal]
Opinion: MDBs have options to remove barriers to global development. [Devex]
About the author
Adva Saldinger@AdvaSal
Adva Saldinger is a Senior Reporter at Devex where she covers development finance, as well as U.S. foreign aid policy. Adva explores the role the private sector and private capital play in development and authors the weekly Devex Invested newsletter bringing the latest news on the role of business and finance in addressing global challenges. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.
