#BTColumn – Movements in Mideast US, Africa, and Europe

Disclaimer: The views and opinions expressed by this author are their own and do not represent the official position of the Barbados Today Inc.

by Stefan Newton

What is ESG?

Environmental Social and (Corporate) Governance (ESG) refers to three central factors in measuring the sustainability and societal impact in an investment in a company or business. In dissecting ESG, The European Commission offers that environmental considerations may refer to climate change mitigation and adaptation and the environment broadly, such as the preservation of biodiversity, pollution prevention, and circular economy.

Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues. For instance, corporations establishing diversity measures in response to Black Lives Matter is a much-welcomed development on the social factor of ESG.

Normatively, ESG aligns with the 2030 United Nations Sustainable Development Goals (SDGs). United Nations Member States adopted the SDGs in 2013 as a blueprint for a better and more sustainable future for all. Therefore, at its core ESG investing is about influencing positive changes in society by being better investors, and corporations delivering on the SDGs. This article presents a snapshot of ESG movements in the USA, and Europe, the Middle East, and Africa (EMEA).

The European Union’s lead on ESG

The European Union (EU) has been an international leader in promoting ESG and is implementing an ambitious and comprehensive package of measures to direct financial flows toward sustainable activities across EU member states. In 2019, the European Commission unveiled the European Green Deal, a growth strategy aiming to make Europe the first climate-neutral continent by 2050.

In March 2021 the EU Regulation on Sustainability-Related Disclosures in the Financial Services Sector (SFDR) entered into force. Under the SFDR asset managers, pension funds and investors will have to disclose how they factor ESG risks in their investment decisions.

As part of branding, corporations have long been making claims of their work in promoting and realizing ESG matters. However, in some cases claims have been inaccurate, and misleading. The term “greenwashing” has been coined to capture this phenomenon.

The SFDR is aimed at eliminating greenwashing corporate reports and branding. For example, environmental NGOs have accused Chevron of greenwashing by presenting a “climate-friendly” image and exaggerating its investment in clean energy when in reality fossil fuels are at the heart of Chevron’s operations. Thus, the value-added of the SFDR is preventing greenwashing and making ESG concerns an essential plank in financial regulation.

Also, supporting the objectives of the European Green Deal is the European Taxonomy, which is a classification system that enables categorization of environmentally sustainable economic activities. The European Taxonomy contributes to the realization of sustainable financial flows, by providing a robust evidence-based system that enables investors to determine which investments are actually environmentally sustainable. Moreover, the EU taxonomy reduces the opportunities for greenwashing.

The Biden – Administration, and ESG

Notwithstanding the climate-change denialism of the Trump Administration, there were actions from federal regulators in support of ESG finance. In December 2020 the Federal Reserve formally joined The Network of Central Banks and Supervisors for Greening the Financial System. Moreover, the Federal Reserve cited the threat of climate for the first time in its Bi-Annual Stability Report. Additionally, The Commodities Future Trading Commission released a report deeming climate change as a major risk to the stability of the USA’s financial system.

Under the Biden Presidency, the USA has returned to the Paris Agreement and has a renewed focus on making financial flows consistent with a pathway towards lower greenhouse gas emissions and climate-resilient development. Within President Biden’s first 100 days in office, there have been foundational movements on ESG. On February 1, 2021, the United States Securities and Exchange Commission announced Satyam Khanna as its first dedicated ESG policy advisor. Additionally, other persons with strong ESG backgrounds, such as Gary Gensler, have been appointed to key posts in the Biden Administration. These strategic appointments certainly are indicative of the Administrations’ frontal ESG policy, and orientation towards the introduction of ESG- disclosure legislation.

Also, promising for ESG is the Biden Administration’s 200 trillion infrastructure plan which is designed to transform the USA’s crumbling infrastructure into a world-class example of sustainable and resilient infrastructure. Not only is there the environmental element in the infrastructure, but the social as well. According to the White House Fact Sheet, “the plan envisions that 20 billion will be spent on a new program that will reconnect neighborhoods cut off by historic investments and ensure new projects increase opportunity, advance racial equality and environmental justice and promote affordable access.” From a geopolitical lens, the plan is also a response to China’s infrastructure which has often been deemed to be more advance and outpacing the USA’s infrastructure.

The Middle East

In the Middle East, there has been steady progress to diversify economies away from petroleum revenues to low carbon economies. A key offshoot of diversification is that investors are receptive to ESG opportunities. An HSBC survey found that ninety-three percent of investors in the Middle East are interested in ESG. For instance, investment in renewable energy, green bonds, and other green industries was cited as priorities for investors.

Additionally, the survey found that investors see the value in sustainable infrastructure. For example, the planned Masdar City in UAE is with its complete reliance on solar energy, renewable energy, and attractive futuristic concepts such as driverless cars. Masdar city is estimated to cost USD S18-22 Billion. Furthermore, in the wake of COVID-19 Middle Eastern corporations are placing more emphasis on principled social welfare, such as employee’s wellbeing and avoiding excessive management pay.

Disclosure principles are also of value to Middle Eastern corporations with 98 percent claiming that they disclose how they align their practices with the United Nations SDGs. In terms of regulatory laws and policies, Middle Eastern Governments are exploring the issue. According to the OECD, Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE have all revised their corporate governance codes since 2015.

Combined with the region’s shift to diversification, among them the participation of the private sector, it is probable that there will be a thrust towards ESG disclosure as changes continue in Middle Eastern corporate governance. Moreover, it has been confirmed that Abu Dhabi Financial Services Regulatory planning to introduce ESG criteria in the Abu Dhabi Global Market (ADGM).

Africa

The ESG construct in Africa spurs several paradoxes. On the one hand, due to fragile macroeconomic and governance indicators, Africa is arguably the continent that needs the integration of ESG most. Yet, the continent has not witnessed the wave of interest in ESGs that have characterized Europe and North America. On the Environmental plane, despite contributing only 2–3% of the world’s carbon dioxide emissions from energy and industrial sources, it is projected that Africa will be the continent hardest hit by climate change – exacerbating already high levels of food insecurity.

There is both an urgent need and an immense opportunity to operationalize ESGs in Africa. While there have been significant movements in ESG integration at country levels; an important ESG trend in Africa is the use of ESG-related instruments by African Development Finance Institutions to meet the unique challenges of the continent. In March 2020, the African Development Bank issued its USD 3 billion Social Bond. This is the largest ever US dollar-denominated Social Bond, and its capital is being utilized to fight COVID-19

The bond issuance builds on the Bank’s impressive capabilities in ESG-related financings. Since 2017, the Bank has issued about $5 billion worth of such similar financing instruments.  Seven months after the AfDB’s social bond issuance, the African Finance Corporation issued its inaugural Green Bond CHF150 million. AFC’s bond issuance is targeted at improving Africa’s human development, reducing poverty, increasing job creation, industrialization, and climate resilience which match the ambitions of SDG1-“No Poverty”,  SDG 8- “Decent Work and Economic Growth”, SDG 9- “Industry, Innovation and Infrastructure” and SDG 13- “Climate Action”.

The successes of these issuances will have a signaling effect on the market. African companies are viewing ESG-financing as a veritable source of capital. This will in turn lead to integrating ESG considerations in business operations in a bid to become well-structured for such financings.

In the practical sense of the concept, ESG considerations are not alien to Africa. Traditional African societies were characterized by communality and the belief in UBUNTU (I am because we are). Societies had social safety nets and were conscious of their impact on the environment. Consequently, once the ESG concept takes root on the continent, Africa has the potential to become an ecosystem leader.

Moreover, reducing poverty is a central focus in African countries. Examined from this perspective, Africa presents a unique opportunity to tailor ESG regulations with the objective of respecting human rights, establishing strong business and human rights paradigms, and directing corporate activity towards the realization of Sustainable Development Goal 16 – “Peace, Justice, and Strong Institutions.”

Looking Forward

It is clear that the international community is at a juncture where the political will to implement the Paris Agreement is the highest it has been since the conclusion of the Agreement. Put frankly, the international community is finally putting their money where their mouth is. There is a unique window of opportunity for Developing and Least Developed Countries to attract foreign capital to fund sustainable development in their own countries.

At the same time, there will be growth disclosure and regulatory compliance issues on ESG. Countries must continually be abreast of these developments as they engage foreign investors and multinational corporations. Companies must also assess their business operations and integrate ESGs considerations throughout their value-chains. This is the right thing to do – for our current populations, and for the inter-generational equity of humanity.

Stefan Newton is a Barbadian national and United Kingdom Chevening Scholar. He is a graduate of The University of the West Indies Faculty of Law, American University Washington College of Law, and Queen Mary University of London Centre for Commercial Law Studies. He has been a consultant with the United Nations Environment Programme (UNEP), the United Kingdom Department of International Trade (DIT), and the Government of Barbados Ministry of International Business and Industry. 

Boluwatife Anjola is a Nigerian national and a graduate of The University of Ibadan where he obtained a Bachelor of Laws with First Class Honours. He is currently an Intern Project Manager at Impact Investors Foundation – founded through an alliance of Ford Foundation, African Capital Alliance (ACA), BusinessDay Media, Bank of Industry and Dalberg Advisors.