Strange Fears of an Acronym

Or How the West Should Stop Worrying and Leverage ESG

Photo by Cristi Ursea on Unsplash

Prologue: A version of this essay appeared in the Globe and Mail Report on Business section on August 11, 2023 under the title “ESG investing is a powerful tool for the West, but we need to focus on the S and the G”.

Environment, Social and Governance – “ESG” – is becoming weaponized. It is being used as a cudgel by the left to ban certain investments or force irrational timelines for decarbonization. On the right, ESG is becoming embedded in culture wars in the United States. Rather than western democracies fighting amongst ourselves about whether ESG is a form of self-enlightenment or self-flagellation, we could be leveraging its measures to rebalance global trade in our favour.

In the early 2000s, a different three-letter acronym was making the rounds in corporate boardrooms. CSR – Corporate Social Responsibility. CSR discussions focused on regulation, transparency and expectations placed on management and directors. Advocates promoting more government intervention used CSR to demand more regulation, while free market voices believed CSR was best achieved through director education and better corporate governance. You could see the left and right political spectrum in the CSR debates, but there was no vitriol in the discussion.

Over time, CSR led to increased transparency and regulation in some sectors and director education and governance reform across industries. One of the criticisms of CSR, and its progeny ESG, however, has been that some of this work was nothing more than greenwashing or corporate public relations. Glossy photos of tree-planting initiatives would make the annual report, while overseas supply chains were not mentioned until a factory collapse in Bangladesh or reports of the use of Uyghur forced labour put the company on the front pages. The hypocrisy of ‘organic’ t-shirts stitched by the hands of children will eviscerate any goodwill a brand or company may have gained from other initiatives.

A half-pregnant approach to ESG by a major corporation in western democracies is untenable. Scrutiny is coming on the one hand from ever-increasing demands from shareholder activists and the institutional investors they target. And on the other, workers in the democratic world who play by the rules feel like they are paying the price for cheap labour and bad practices overseas. This is partly why we are seeing the slow unwinding of globalization alongside a steady rise in populist sentiments.

In June, respected institutional investor Larry Fink, the CEO of Blackrock, vowed to stop using the term ESG in their investment strategy after its politicization led to capital flight. Blackrock was getting ‘cancelled’ due to ESG and it wasn’t worth their effort to fight back against voices claiming ESG was evil. Weeks later, Elon Musk joined the cancellation chorus when he declared ESG to be “communism rebranded”. Amid the hyperbole, western democracies are missing the fact that ESG could help set the rules for the global realignment already underway. But to do so, we need to get serious about the S and G parts of it – social and governance.

Shareholders and consumers in western democracies now expect labour standards and other social issues to be measured and reported alongside carbon emissions and financial performance indicators. As reported recently in the Globe & Mail, in January 2021, the federal government promised a series of measures “to address human rights abuses in Xinjiang,” including “the prohibition of imports of goods produced wholly or in part by forced labour.” Almost three years later, Canada has failed to intercept any imports of goods made with forced labour in Xinjiang, or any other place we know uses it. Democratic countries like Canada must get serious and follow through on these forms of sanction or trade action, and corporations must also get serious to ensure that their supply chains are completely free from such abusive practices.

ESG presents the democratic world with an opportunity to use some of the best aspects of free market capitalism as a bulwark against those who have been gaming the rules-based order. ESG is about measurement and transparency. When used strategically it could promote the security and trade interests of the democratic world and give more weight to high standards of human rights adherence, labour practices and environmental stewardship.

Carbon border adjustment tariffs and national security considerations could be used for sectors like steel and aluminum to give our industries an advantage while lowering emissions in the process. Supply chain transparency could be used to keep forced labour or counterfeit goods out of our retail stores. And sourcing rules for energy - from oil and gas to critical minerals - could make Canada a supplier of choice for the democratic world.

The combination of trade policy along with security and democratic values considerations is something many of our allies have been moving towards for several years. It is something I advocated for in the NAFTA renegotiations and later used ESG as a guide to this approach when I was Conservative Leader.

I wish I was more successful in these efforts at the time because it was before the concept of ESG became so politicized. The media obsession with the controversies and style of the Trump presidency made it nearly impossible to talk about anything in a serious or strategic way even when some of the policies with respect to trade with China were in our national interest. It is important to note that the Biden administration has largely not deviated from the Trump administration approach on China. In fact, in many ways Biden is going even further. It is also very interesting to note that the Trudeau government is now touting this same approach to trade policy under the “friendshoring” portmanteau.

If we can weather this period of political friction, ESG could create a new, rules-based approach to enforce domestic or friendly nation trade preferences while applying tariffs on bad actors. Do more with friends and set limits on outliers transforming global trade into an aspirational exercise. We could still have healthy free market competition, but in a manner that respects global initiatives on labour standards, intellectual property and climate change.

Democracies like Canada are already measuring and holding ourselves to account. It is about time we started holding other countries to account too. We shouldn’t let handwringing over an acronym delay that.