How do geopolitical shifts regarding ESG affect our position as a responsible investor?

The European Commission has a clear view on Environmental, Social and Governance (ESG). This is a view of a “climate-neutral, climate-resilient, resource-efficient and fair economy”. In 2018, the European Commission (EC) published an action plan (EC, 2018) laying out steps on ensuring a more sustainable future for Europe. As we speak, the European Union (EU) is expanding this action plan, which carries far-reaching implications for corporations and governments.

 Such new measures bring positive effects on our society, but carry the challenge of an ever-complexifying regulatory landscape for organizations. Due to these new terms and rules, the misuse of terms like ESG, CSR and responsible investing can result in greenwashing (Schwartzkopff, 2022) .

Organizations bending or avoiding these ESG rules and regulations, but publicly seeming to support these, jeopardizes the faith of society in ESG. This is intricately linked with responsible investing , calling for stricter rules on ESG-focused funds. The interconnectedness of global players coupled with increasingly diverging stances towards ESG, shows the importance of adopting a broader approach. This article aims to highlight the geopolitical complexities of ESG.

State level regulators and the Biden Administration are adamant to tackle ‘climate pollution and climate-related risks in every sector of our economy’ (The White House, 2021)  and created the Climate and ESG Task Force. This means, for example, that companies have to disclose information on ESG-related risks to investors. 

A growing group of anti-ESG investors have criticized ESG legislation and their underlying purpose and values (Lu & Silk, 2023). For example, the CFO of Florida banned state pension funds from investing in ESG, because investment decisions should only be guided by financial returns (Marques, 2023). The decentralized nature of the American federal system and the power of state officials are important to consider when it comes to the risk this brings to the development of ESG. 

Biden's Administration started the Inflation Reduction Act with millions of dollars of subsidies directed to companies willing to work on a sustainable economy (Brown & Sanchez, 2023 ). By offering these subsidies to swing states won by Trump during the past elections, Biden aims to win these voters back by supporting them financially (Day & Wise, 2022) . This perspective suggests that ESG is being leveraged to meet politically-motivated ends. 

The USA’s changing and evolving ESG movement brings a ‘threat’ to European ESG. The recent subsidies established by the Biden administration tempt Europe-based organizations to move towards the United States and profit from this financially. For example, large car manufacturers like Mercedes-Benz and Volvo are considering this move (Brown & Sanchez, 2023). If larger companies move to the USA, Europe may lose its leading position in sustainable investment. Moreover, the USA has the potential to become a threat to European ambitions if the movement against ESG gains momentum, particularly if a conservative Republican wins the 2024 elections. This highlights the volatile nature of the ESG discourse within the United States. Thus, it is vital to consider the consequences of potential geopolitical shifts regarding ESG (Bindman, 2023).

Asia has been gaining pace in its progress within the realm of ESG and sustainability, albeit slowly (PWC, 2020). The heterogeneous nature of different fund markets in Asia implies that the adoption of ESG in these markets has been quite diverse. The common thread, however, is the increasing awareness and importance of ESG in asset and wealth management. While there is effort all across Asia, including countries such as China, India and Indonesia, China deserves particular consideration, given that the country is largest carbon emitter and simultaneously the second largest green bond issuer after the USA. The People's Bank of China is encouraging banks to engage in green financing by issuing or investing in green bonds (Wu & Ahmad, 2023). Adding to this, China is a massive manufacturing powerhouse, which notably results in an unchallenged domination of the solar-panel industry (Richter, 2021). 

According to PWC, China is committed to achieving a green economy, focusing on sustainable development in its 14th five-year plan (covering 2021–25). Another effort consists of the Asset Management Association of China (AMAC), which issued guides on green investing (AMAC, 2018) and built a core indicator system to measure the ESG performance of listed companies (AMAC, 2019).

In contrast, China is being accused of complacence with regards to human rights violations towards the Xinjiang’s Uyghur population (White & Lockett, 2022). In a landmark report, the UN’s top human rights body claimed China’s actions could constitute “crimes against humanity” (White, 2022). Beijing has denied the allegations as a “fabricated lie” (Euronews, 2022). Other issues raised are the reports of internet censorship and privacy concerns. Sustainalytics observed that internet censorship in China was increasing , leading to the downgrading of Chinese tech giants on its watchlist — Tencent, Weibo and Baidu — to the category of “non-compliant with UN principles” (White & Lewis, 2023).

African countries are increasingly implementing ESG finance policies, according to a study by think-tank OMFIF and South African bank Absa (Savage, 2022). Out of 26 surveyed countries, 17 have sustainability-focused policies as of October 2022, against 12 in 2021, with South Africa being the furthest along (Stewart, 2022). 

Future regulatory developments are anticipated to continue driving ESG integration, as Africa's regulatory regime matures and offshore jurisdictions, such as the EU progress on the European Green Deal (Brand, 2022). The anticipated EU directive on Corporate Sustainability Due Diligence (CSDD) is likely to have far-reaching consequences for African entities exporting into the EU and/or undertaking business with EU entities. Additionally, the EU Resolution makes it clear that the European Parliament has initiated a path aimed at guaranteeing that EU entities are held responsible for any actions that may result in negative consequences for human rights, the environment, and good governance worldwide (Pretorius et. al., 2021).

Although Africa is responsible for only 2-3% of global GHG emissions, it is projected to be affected disproportionately (United Nations, 2022). Africa’s average temperature is rising faster than the global average, and four out of five countries on the continent are unlikely to have sustainable water management systems by 2030. High water stress could displace up to 700 million individuals by 2030. 

In terms of ESG, the environmental gains for Africa are less grounded in their ability to decrease carbon emissions than in other endeavors. For instance, South Africa recently issued ‘Rhino bonds’, which are wildlife conservation bonds with the express goal to increase biodiversity and the population of rhinos (World Bank, 2022). That being said, in a 2022 study, the World Bank points out a strong lack of integration of climate change policies in asset managers’ strategies, and identified pension funds as the “‘elephants’ of the local financial markets [who] could be the catalysts for greening the continent’s financial systems” (Stewart, 2022).  

Worldwide, financial markets participants behavior is increasingly scrutinized. While the growing societal demand for asset managers to embrace their role as potent drivers of change in Europe leads to more ambitious standards, skepticism regarding the alleged motives and benefits of ESG rises on the other side of the Atlantic. While China appears to adopt very selective and contradictory stances regarding ESG, the African continent is mostly left behind despite being primarily affected by climate change. In the face of emerging disparities across regions and continents, how do geopolitical shifts regarding ESG affect our position as a responsible investor?