It’s hard to find an interesting take on environmental investing. Most of the institutions talking about it rely on the same set of arguments, down to the specific sentence structure of the press release.
Enter Renaissance Capital, the Russian investment bank that specialises in emerging markets. The company, which obviously has financial and commercial interests of its own, has a very different take on the Environmental, Social and Governance (ESG) investing trend currently sweeping through the boardrooms of the City.
The ESG trend is marketed as a means of directing capital into a designated class of ethically commendable causes, from combating climate change to boosting social inclusion. This is often achieved through the unromantic medium of corporate bond issuance, but there is also a rise in sovereign ESG issuance — in February, Belgium borrowed $4.5bn, following sales from France and Poland.
As we have pointed out before, the emergence of a new “green asset class” is tied in to the prospect of legislative changes, especially in the field of financial regulation, that might ultimately force investors to hold green assets. It highlights the way in which the emergence of many other asset classes — such as those related to housing, to take one example — can be traced to political, rather than economic, attributions of value.
The central issue Renaissance identifies is that emerging and frontier markets are “(almost by definition) less well governed, more corrupt and increasingly polluted.” It constructs its own index of ESG scores, based on an array of data. It is topped by Denmark and Sweden — “if your ESG goal is to invest in mostly white, rich, Christian-heritage Scandinavian countries, then this index is for you.”
The report goes on: Sending children to school, avoiding slavery, giving women the vote and therefore having a democracy, low corruption and clean water are all ESG goals that the UK and the US (among others) only endorsed as they got rich, not before they started industrialising.
A similar line of argument sometimes comes up in the debate around China’s and India’s industrial development — it is one of many typical charges of Western hypocrisy. Whether you agree or not, it is at least worth noting the extent to which ESG performance correlates with societal wealth:
(As a side note, the report finds “virtually zero correlation” between ESG scores and sovereign bond pricing after adjusting for per capita GDP.)
Renaissance’s argument thereafter is that, even if emerging markets have far lower ESG scores, directing capital their way allows for the highest overall rate of improvement, and so the greatest ethical utility. This is, unsurprisingly, an argument for more investment in EM. This part of the bank’s argument is widely found across the ESG universe — a range of participants cite a mutual compatibility between green finance and developing economies. China issued a third of the world’s green bonds in 2017.
But this arrangement raises the question of whether an ESG framework will in the future impede investment into regions that are deemed environmentally unfriendly. If poor countries can develop through green energy alone, there isn’t necessarily a conflict. If they can’t, they end up starved of capital, especially if Western institutions are discouraged from holding the assets that would otherwise pay for their development.
It was always inevitable that the construction of an ethical framework would lead to cascading ethical conundrums. You could argue that the optimal green bond would be one issued by an oil company to divert its capital expenditure into renewables. It would be a gargantuan task to compute the various trade-offs: the extent to which the good new thing stopped the oil, or helped to keep it flowing.
Source Financial Times