June 21, 2021 - by Tess Virmani. Along with the “new normal,” ESG (Environmental, social and governance considerations) is today’s business buzzword. The recent “How Domestic and International Politics Are Shaping the ESG Agenda” webcast presented by David Chmiel, Global Torchlight, looked at how politics are shaping the ESG agenda and the issues to keep our eyes on.  For a long time, particularly in the U.S., the focus on ESG has come from the bottom up and has been led by market forces rather than a political and regulatory push. But, political issues are prioritized based on their inherent “opportunity cost” and the increasing political focus on ESG is therefore good politics and a top-down approach to ESG is likely to be a hallmark of the Biden administration at least (and perhaps successive administrations).  Turning to the financial markets, ESG is as much of a buzzword in the loan market as it is anywhere else.  Members have enthusiastically supported the LSTA’s efforts in responding to innovations in sustainable finance, such as the emergence of social loans and the evolution of sustainability linked loans, as well as the LSTA’s launch of ESG DDQs in response to the near ubiquitous demand from managers and investors for reliable ESG information. The summary below looks at the key political influences that will shape these efforts.

Of note, is that while climate change is becoming an increasingly important issue politically, the pandemic has changed the discourse about governments as an economic actor – leading to a marked increase in the focus on “S” and “G”. It would seem all three silos need to be viewed as equals going forward. Global focus on climate change was set to explode in 2020 but was sidetracked by the pandemic-related issues governments needed to attend to. As the pandemic abates, that explosion will likely be seen. Interestingly, countries’ views on climate change are not uniform. Small, island nations and high-income nations see it as a global emergency, but middle income and less developed countries see it far less so. This is due to the natural tension for the latter countries of the remediation of climate change effects and these countries’ need to undergo a significant industrial revolution in order to enjoy the standard of living and higher wages of developed countries. This tension – while perhaps self-evident – will be a challenge for businesses to navigate going forward.  Turning to social and governance considerations –their importance may be recognized anew, but Chmiel points out that the debate about these issues first arose at the start of the industrial revolution during the “Gilded Age”.

If we assume broad change will be needed in the near term to properly address ESG issues, Chmiel delved into whether that change would be met by popular support. Pew Research Center recently asked: “Do you think your economy and system need a major overhaul in light of the events of the pandemic?” Nearly 50% of respondents supported a major overhaul/change. Looking to that as a dispositive data point, political parties around the world see that they may in fact have the popular mandate to address issues and introduce regulation in new ways.  But does that mean climate change? In January 2021 the United Nations Development Programme released data showing undeniable support for green technology investing and green lending, but changes that would require sacrifice by consumers – such as a rejection of fossil fuels or a move to a plant-based diet – was markedly less popular. Relatedly, looking at Fall 2020 data, Pew Research Center recorded significantly greater support from people of all parties for the government to address racial and economic inequality, rather than climate change. Similarly, support from Democrats was greater for the government to tackle racial and economic inequality over climate change. As noted above, the “S” of ESG is of increasing importance to individuals and that trend may have introduced a moral suasion for companies.  The issue of highly leveraged companies has been political hot button, but as reported recently by WSJ, despite current high levels of corporate debt, the funds raised during the pandemic were not spent on dividend recaps or shareholder buybacks as may have been suspected, but instead were used by companies to weather the crisis.

In closing, Chmiel turned to political dynamics at the international level – will the future be one of cooperation or of competition and new forms of resource nationalism? Only time will tell, but it is notable, that the decades of global cooperation have already been disrupted by competition and nationalism in other areas.  The safest assumption going forward is that ESG ≠ Green Agenda despite historical reality / perception and social and governance considerations cannot be ignored.