Earlier this year, during the Davos Agenda, French President Emmanuel Macron stated that modern capitalism no longer works and stressed the need to move past the Washington consensus. President Xi Jinping of China made a similar case for a greater role for G20 in economic governance. Neither startling nor new, their comments reflect a persistent critique of international finance and the Bretton Woods system.
In a world increasingly dominated by private enterprises that control ever more of the global capital, infrastructure, and technology, a post-World War II governance framework that does not consider the nuances of private sector participation is, not surprisingly, pressed by the exigencies. However, a capitalism that abdicates responsibility towards problems facing our planet isn't feasible or desirable either.
Amidst this divergence, the ongoing environmental, social, and governance (ESG) led reorientation of the financial system offers hope to cross this chasm and organically establish roles for private players in addressing socio-economic challenges. The core idea of ESG, that the success of an investment should include analysis of performance on non-financial social and ethical issues, provides a financially attractive model to increase their participation and support for legacy institutions.
Private Sector Capacity for Crises
Consider for example the international response to the COVID-19 pandemic; countries that have been able to successfully develop vaccines and embark on mass vaccination drives formulated effective partnerships between business and government, both motivated by their own interests.
The key global vaccines that satisfy stringent regulatory frameworks have been developed, commercialized, and manufactured by private sector participants or in some cases via public-private partnerships. Internationally, the largest COVID-19 vaccine manufacturer by some distance is an Indian company, the Serum Institute. It could develop this capacity, in part, thanks to at risk-funding by the Bill & Melinda Gates Foundation, a private organization, and the Gavi Vaccine Alliance, a public-private partnership. Logistically too, few governments have the capacity to address bottlenecks associated with vaccine transportation. The spurt in e-commerce has prepared the likes of DHL for this arduous task better than many governments.
Israel, which boasts one of the most efficient inoculation programs, has been able to do so primarily due to its symbiotic partnership with Pfizer and private care providers, who raced to set up vaccination centers in stadiums, parking lots, and parks. Yuli Edelstein, the Israeli health minister, said, "The company will be able to boast about it, to make profit from it and to publicize it . . . without this [partnership] any company wouldn't even be looking at our direction."
Inevitably, and perhaps validly, there will be concerns about over-reliance on, and exploitation by, the private sector. However, as the adage goes, crises make or break reputations. At the start of this crisis, Canadian economist Mark Carney wrote, "When it's over, companies will be judged by 'what they did during the war,' how they treated their employees, suppliers and customers, by who shared and who hoarded."
With the development of ESG-centric financial markets, there is a genuine business case for companies to adopt a social purpose and embed that thesis into their business models. Dilettantes will be disciplined by the market. Last year, a study by Société Générale found that ESG controversy caused a company's stock to underperform by 12 percent, two-thirds of the time on average.
Bringing Capital for Development
The funding gap to achieve the Sustainable Development Goals, which are 17 UN-endorsed goals to address the global challenges, including poverty, environment, and justice, is estimated to be $2.5 trillion per year. Without a strategic and expansive influx of private capital, it is likely that many of these problems will be exacerbated.
These and similar concerns prompted the World Bank to develop and issue green bonds, which allow issuing entities to raise money for specific environmental projects, such as renewable energy, drinking water, and clean transportation. Green bonds allow developing economies, which have historically relied on development finance institutions, to access more diverse sources of capital. Fiji became the first emerging market to issue a sovereign green bond in 2017 and since then Mexico, and Egypt have followed its lead. Later this year, the UK government plans to issue £15 billion worth of green bonds, one of the largest green issuances globally.
A study by Amundi SA, also found that issuers of green bonds have received a premium of up to 0.11 percent on their borrowing costs. The wealthier Western states have also found new allies in BlackRock, Vanguard, and State Street. These firms, which together control nearly $11 trillion of assets, have publicly committed to reviewing ESG issues in investment decisions while continuing to fulfill their obligations to deliver financial returns to their investors.
Building Consensus for Governance
Marcon and Xi are not outliers—there is a widespread belief that reform of international institutions is overdue. However, due to the often diverging objectives of the U.S., the EU, China, and the developing countries, the proposals have proceeded in fits and starts. As the interests have diverged further, reform efforts themselves have become a conflict zone of geopolitics.
Crafting consensus in these circumstances is tough and requires concerted efforts, compromises, and a basic agreement on shared principles. This is where an ESG-centric governance framework can be useful.
For liberal democracies, such as Canada, ESG offers a way to highlight their shared values on a wide range of issues, including a commitment to diversity, responsible resource development, and human rights. While implementation strategies differ, by and large, there is also consensus amongst large economies that green and low-carbon infrastructure projects will be the cornerstone of recovery efforts after the pandemic.
ESG also offers a humanistic way to harmonize regulatory frameworks of emerging economies with international best practices while encouraging multinational corporations to conduct themselves responsibly. This should appeal to reform-minded leaders who are wary of neoliberal policy prescriptions but constrained by heavy regulation and low output.
To be sure, using private players to support international governance is not novel. Not so long ago, in 2006, UN Secretary-General Kofi Annan called upon large institutional investors to launch the Principles for Responsible Investment. However, the manner of ESG integration in financial markets and the speed of capital reallocation during the past year has been extraordinary. It is no longer about altruistic or peripheral gains, but about the transformation of sustainability into the core-investment thesis.
To realize its potential, ESG needs to be articulated in the clearest possible terms. The myriad sustainability frameworks (WEF, TCFD, SASB, GRI, CDSB) need to be distilled into one model so that it enables meaningful asset differentiation. It should reflect vulnerabilities of all sectors and not just low-hanging fruit like the fossil fuel industry.
Ravipal S. Bains is a member of the Carnegie New Leaders program and an associate, capital markets & securities at McMillan LLP. This essay does not necessarily reflect the views of Carnegie Council.