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ESG Will Not Help the Global South

Now that environment, social, and governance standards have gone mainstream among investors in the advanced economies, the question is what ESG criteria will mean for developing countries. A closer examination shows that such standards have little to offer export-dependent economies, and may even prove counterproductive.

CAMBRIDGE – The concept of environmental, social, and governance (ESG) reporting standards has gone mainstream. Major Wall Street firms have adopted ESG standards as a guide to responsible investment, compelling the thousands of corporations in which they invest to do so as well. But is ESG helping investors and corporations that operate in the Global South allocate capital more efficiently? Or is it just an expression of the rich world’s postmodern values and priorities?

ESG requires companies to report on their environmental practices and associated climate risks; on their treatment of workers, clients, and the communities in which they operate; and on various governance criteria such as board diversity and the regularity of internal and external audits for bad behavior. The process is meant to leave investors more informed about a firm’s overall impact on stakeholders, the implication being that unless firms are aware of their overall impact, overlooked or neglected issues may come back to bite them.

The ESG approach thus mixes the dictum that “what gets measured gets managed” with the late Harvard University professor John Ruggie’s observation that corporations have an interest in adopting their stakeholders’ values, such as human rights. On the face of it, this looks like an improvement over a narrow focus on the bottom line.