Within our capitalist economy there is financial muscle bringing about change around the world, while progressive politics still struggles to lift its attention from its navel.
Job retention schemes and support for businesses through fiscal and monetary policy have been essential parts of pandemic crisis management. These schemes are still required but their existence raises questions. Should companies benefit from loans supported by government guarantee if they pay abnormally low levels of tax? Should companies which treated employees badly during the pandemic be considered worthy of backing? These questions feed into wider debates about what kind of economy we want to have. For the most part, progressives have lacked the power to do anything meaningful about this. Meanwhile, a growing movement is actively pushing for change in parallel to political conversations and separate from activist campaign groups such as Extinction Rebellion. Reform of corporate behaviour is being pushed by ethical, or socially concerned, investors. In the short term, this is compensating for the failure of progressive politics but it could also be a portent of a political revival.
For decades there have been investors who believe that their responsibilities as shareholders go beyond pushing for higher profits and growing dividends. Starting with churches investing their reserves with investment policies that reflected their values, the movement has grown. Once known as ‘ethical’ or ‘responsible’ investment, it is now generally referred to as taking an ‘ESG’ approach to investing – short for Environmental, Social, and Governance.
ESG investors believe that companies should be run with attention being paid to all stakeholders and not simply shareholders. Some maintain that companies which do this will provide better long-term investments, since by acting sustainably they will be less vulnerable to reputational risk or to changes in law and regulation. ESG investors aim to hold in their portfolios only companies which score well on ESG criteria, or to at least exclude the worst offenders. They will engage extensively with the companies in which they invest. This engagement can range from simply writing to the company, meeting with company executives, voting on executive pay, and filing shareholder resolutions. If a concern is sufficiently material and no change is forthcoming, investors might sell their holdings.
In the past year, ESG investing has moved further into the mainstream. Last year, the IMF estimated that although ESG equity funds represented less than 2% of global investment funds, they were nevertheless worth $850 billion. Morningstar – an American financial services firm – estimated recently that the ESG market is worth $1 trillion, with inflows in the second quarter of this year, so far the height of the pandemic, totalling over $71 billion. A number of factors may be driving this trend. The financial industry has finally realised that there is a large market of socially concerned investors out there. In addition, people fed up with slow progress by governments are trying to effect change outside politics, with the threat of climate change being of particular concern.
Business has noticed. Last year, the Business Roundtable – an association of CEOs of major companies in the US – changed its mission statement to move away from a singular focus on shareholder value to an appreciation of other stakeholders. Quite what changes in corporate behaviour will result is not clear, but it represents an acknowledgement by companies that a growing proportion of people expect businesses to behave with more social responsibility.
ESG investors can point to some noteworthy successes. European oil and gas companies have been racing each other to show how they intend to align with the Paris Agreement on climate change, responding to investor pressure. BP’s announcement in August that it would cut carbon emissions to net zero by 2050, is simply the latest example. A recent investor initiative has persuaded mining companies to improve safety standards for tailings dams, which could save hundreds of lives. Companies have been pressed to pay the living wage and are being held to account over efforts to combat modern slavery. During the pandemic, many ESG investors have focused on the fair payment of tax and on the treatment of employees including with respect to mental health.
The growing influence of ESG has not gone unnoticed by policy-makers. Increasingly, governments see the promotion of ESG as a route towards policy outcomes they lack the power to achieve in other ways. For example, UK pension funds now have to declare the financial and non-financial ESG risks they have considered in their investment strategies, and will soon have to show they are thinking about the financial risks of climate change. The Taskforce on Climate-related Financial Disclosures (TCFD) also has a set of standards that are likely to become mandatory. European Union regulation on sustainability-linked disclosures comes into force in March 2021, and will require investment firms to report ESG data. The intention of these initiatives is that more investors will consequentially demand more ESG data from companies that will drive changes in corporate behaviour – and all without further changes in law or regulation.
The growth of ESG investing should be a sign of hope for progressives. It demonstrates that there are concerned citizens with savings who want an economy where stakeholders are treated fairly, and where the environment is cherished. It may also signal that there is a hunger for government action to reform economies along these lines, which is distinct from a hard-left version of anti-capitalist socialism, populist mercantilism, or right wing veneration of the private sector. It seems too that companies want better direction from government on ESG issues. This will require changes in law and corporate regulation, bringing politics to bear on the concerns of ESG investors.
Governments need to be proactive about reforming the market economy, rather than take it as a given. After all, our developed market economies have changed considerably over the past couple of decades. There is more concentration of economic power and little progress combatting inequality, which the pandemic seems likely to make worse. No clear decision was made to transform economies in this way; they simply changed over time without governments noticing or effectively responding. As we attempt to find new ways to organise economies in ways that are consistent with progressive values, we can learn much from the rise of ESG investing. However, to make significant headway, progressive politics will need to shake off any tendency to regard business as a necessary evil or simply a source of tax revenue. Investor pressure cannot solve every problem and progress needs to be underpinned by legislation. Nevertheless, the sometimes parallel world of ESG investing demonstrates that reform of the market economy is possible, especially when the right incentives are in place.
This article was first published by Policy Network on 1 October 2020.