Follow Your Money

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Well and Good

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Why is so much “socially res= ponsible” investment going to autocratic countries? Marcos Bu= scaglia on one of the financial world’s big blind spots.

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Adam Nir

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In an appeal to environmen= tally conscientious investors, Turkey issued a US$2.5 billion gree= n bond last month, attracting a rush of global interest and selling to inve= stors predominantly in the United States, the United Kingdom, or Europe. A = green bond is a financial instrument—and a category of socially respo= nsible “ESG” investment—used to raise capital for environ= mentally sustainable projects.

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It all coincided with a tough reel= ection campaign for Turkey’s president, Recep Erdo=C4=9Fan, whose rul= e has become increasingly autocratic since he took office in 2014: After a = coup attempt in 2016, Erdo=C4=9Fan purged his critics from the judiciary, m= ilitary, police forces, civil service, universities, and news media. The U.= S.-based Freedom House—whose annual report is broadly considered a go= ld standard on political liberty in the world—has meanwhile downgrade= d Turkey’s ranking from Partly Free to Not Free; an= d the Committee to Protect Journalists now considers it the planet’s = fourth-worst jailer of reporters, behind Iran, China, and Myanmar. So why a= re socially responsible Western investors now bankrolling Turkey’s go= vernment with an ESG bond?

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Marcos Buscaglia = is an economist, the former head of the Latin America economics team at Ban= k of America Merrill Lynch, and the author of the forthcoming Beyond th= e ESG Portfolio. How Wall Street Can Help Democracies Survive. To Busc= aglia, the answer is, for every ethical issue they may be considering, they= ’re not thinking about democracy.

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This article is part of a series in partnersh= ip with the Human Rights Found= ation. Buscaglia will be a speaker at the Oslo Freedom Forum in June.

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J.J. Gould: Let&r= squo;s start by touching on the technical question here: What are ESG inves= tments, exactly, and how do they work?
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Marcos Buscaglia:= The idea of socially responsible investment—the idea that ethical co= nsiderations, beyond financial returns to shareholders, should also govern = investment decisions—has been a theme forever. In the West alone, the= re’ve been major campaigns in recent decades to promote divestment fr= om Apartheid South Africa, for example, or tobacco companies.
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ESG indexes are different in the s= ense that they represent a whole new layer of investment analysis. They say= , yes, investors will want to consider all the customary factors—fina= ncials, products’ market fit, projected cash flows, and so on—b= ut they can now also look systematically at other factors that help them al= ign their investments with their values.
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The framework for these indexes is= called “ESG” for Environmental, Social, and Governance. Essentially, the framework evaluates the sustainability and broader ethi= cal impact of an investment. Environmental factors include things like carb= on emissions, resource usage, and waste management; social factors, things = like a company’s relationships with its employees, customers, or comm= unities—including labor practices, diversity and inclusion, and so on= ; governance focuses on things like leadership, transparency, and accountab= ility in decision-making processes.
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Gould: Thinking a= bout Turkey’s big green bond, then, what’s the problem there&md= ash;assuming it’s marked for legitimate green initiatives? Investment= going to them is good, no?
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Buscaglia: There = are two problems. One is with what we know: This bond supports an autocrati= c regime. It’s a government bond, issued by an autocracy. I like gree= n bonds, you know, but I don’t like that.

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The second is with what we don&rsq= uo;t know: Just over a month before an election everyone thought Erdo=C4=9F= an would lose, his government issued the equivalent of $2.5 billion. Then, = he won and forced a runoff election, happening this weekend. We know Erdo= =C4=9Fan’s campaign was spending like crazy, but we don’t reall= y know what money was flowing into it.

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Like many countries where democrac= y is weak, Turkey formally holds elections, but it doesn’t have liber= al rights, or the rule of law, or transparency in any sense that would allo= w us to see where all the money from its green bond is going. And of course= , money is fungible—so even if it was properly directed to green proj= ects in this case, it will also have liberated funds from the budget of a g= overnment that’s under the control of a ruthless autocratic leadershi= p. Either way, this big green bond ends up being a big greenwash.

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Gould: Because Tu= rkey is autocratic, we know its green bond is supporting autocratic rule; a= nd also because it’s autocratic, there’s lots we don’t kn= ow about how the bond is supporting autocratic rule?

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Buscaglia: Exactl= y.

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Gould: How have c= onsiderations related to democracy figured into ESG ratings, then?

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Buscaglia: Virtua= lly not at all. If we look at books about ESG, the word democracy = almost never appears in them. If we look at research papers related to ESG,= the word is likewise very difficult to find. Sibling language like hum= an rights will appear every now and then. But democracy is al= most completely absent. Basically, ESG does not take democracy into account= .

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We’re talking about Turkey&r= squo;s green bond as an example of what can happen with the exclusion of de= mocratic considerations from ESG ratings. Here’s another—to me,= very striking—example: J.P. Morgan has indexes of government bonds t= hat are very popular, very widely tracked. They’re very good. And the= y include ESG-corrected indexes. The day Russia invaded Ukraine, Russia had= a bigger share in J.P. Morgan’s ESG-corrected index than it did in t= he non-ESG-corrected one. So as an investor in government bonds looking at = J.P. Morgan’s indexes, you’d have ended up with more Russian bo= nds if you’d taken ESG considerations into account than if you hadn&r= squo;t.

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NASA / NOAA

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More from Marcos Buscaglia at = The Signal:
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=09=09=09=09=09=09=09=09=09=09=09=09=09=09=09“It can be hard = to know the answer to a question no one’s asking. But to dat= e, there’s been no real investor backlash on the issue of democracy. = And there’s also been—I think it’s important to note&mdas= h;an assumption among investors that autocracies are generally less messy t= han democracies, that they’re more orderly, and that they ultimately = deliver better returns. So if those returns come at some cost in terms of d= emocratic standards or the preservation of human rights, investors have bee= n inclined to look away.”
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=09=09=09=09=09=09=09=09=09=09=09=09=09=09=09“Luis Martinez o= f the University of Chicago looked around the world at the relatio= nship between nighttime luminosity—the lights from cities that satell= ites imaging can pick up—and gross domestic product, GDP, the standar= d indicator of economic growth. Martinez looked at data from 184 countries = over 20 years, and then he compared it to data on democracy from Freedom Ho= use. And what he found was that autocratic regimes were on the whole overst= ating their GDP growth.”
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=09=09=09=09=09=09=09=09=09=09=09=09=09=09=09“If you look&nbs= p;at the global pattern of populist autocrats taking power—t= ypically after bad economic times—they tend to consolidate their powe= r with economic policies that make them popular. Well, for that, they need = money. And it’s predominantly international investors—above all= , American and European and Japanese investors—who’re providing= it. If these autocrats didn’t have access to those funds, would they= have been able to survive for so long?”

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= Continue reading ...

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