High ESG Scores Foreshadow Economic Decline
Posted: Aug 20, 2022 1:25 AM
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With the recent passage of the costly, yet deceptively named, Inflation Reduction Act in the Senate, the Environmental, Social, and Governance (ESG) movement will be further emboldened. The IRA prioritizes funding for environmental justice, clean energy investments, and achieving net zero emissions, among its climate provisions. The bill’s passage, however, exposes the public to its shortcomings and harmful economic footprint.
ESG’s most troubling aspect—its reporting regime—is facing immense scrutiny because rankings allow companies and governments to project a “good” social responsibility image. But do they hold water? Given their subjective nature and unaccountability stemming from self-reporting, ESG rankings are flawed.
Scores correspond to each of the three prongs—ESG—but the “E” prong measuring an individual country’s carbon and methane emissions doesn’t paint an accurate picture. The World Economics Index scores environmental impact from 0 (high environmental impact) to 100 (low environmental impact) scale.
Unfortunately for ESG boosters, high “E” scores haven’t shielded three nations in the news—Ghana, the Netherlands, and Sri Lanka—from experiencing economic turmoil.
The African nation of Ghana should first be examined. It currently scores a 97.7 out of 100 on the ESG Index. The Ghanaian government was the first in the continent to raise $5 billion from international capital through Green, Social and Sustainability (GSS) Bonds. GSS bonds fund projects with supposed environmental and social outcomes. In May 2022, the World Bank called GSS bonds a “new frontier for Africa that will help the continent build a deeper, resilient, and sustainable financing, according to policymakers, regulators, and peer sovereign issuers from across West Africa.”
But instead of the promised “new frontier,” Ghana experienced high consumer inflation and higher cost of living which prompted protests in the capital, Accra. Earlier this year, Moody’s warned global sustainable bond issuance would be “flat” in response to Russia’s invasion of Ukraine—which is down 28% from Q1 2021. The Ghanaian government didn’t do itself any favors after imposing a tax on electronic payments at the same time. Now the nation, on the brink of economic collapse, is in talks with the International Monetary Fund (IMF) for a bailout.
The Netherlands, the European Union’s largest meat exporter, has also fallen prey to ESG policies. Scoring a 90.7 rating, the Dutch government last year approved a 13-year $21 billion plan to cut ammonia and nitrogen emissions 50% by 2030. The proposal also mandated the number of livestock be reduced by 30% to achieve this goal. That would be a disaster for the country’s 54,000 agribusinesses.
Dutch farmers rightfully perceived this as an attack on their industry and livelihoods by organizing countrywide protests. Unsurprisingly, the Dutch government dismissed their concerns and confessed their goal is to destroy industry jobs, noting, “The honest message … is that not all farmers can continue their business.”
It gets worse for the Netherlands. Last March, Holland adopted a new continent-wide Sustainable Finance Disclosure Regulation (SFDR) to “improve transparency in the market for sustainable investment products, to prevent greenwashing and to increase transparency around sustainability claims made by financial market participants.”
While the European nation hasn’t collapsed yet, the fertilizer reduction use plan may invite problems later since Dutch inflation rate now stands at 8.6%—one of the highest in Western Europe.
Undoubtedly, Sri Lanka’s dalliance with ESG has been a clarion call to the world. Following its president’s resignation, the South Asian nation is basically on the verge of collapse.
How did a country with a 98.1 out of 100 “E” score end up like this? Naturally, the nation rushed to become the first 100% organic farming nation in the world. In April 2021, President Gotabaya Rajapaksa proposed the country ban chemical fertilizer use in farming—a position he ran on during his 2019 presidential run. A group of 30 scientists warned him not to proceed, citing concerns from potential product yield drops. After the fertilizer ban was adopted, the price of rice reportedly surged 30%. By August, the country plunged into an economic crisis. When January rolled around, the country pulled the plug and announced one million rice farmers would be compensated a sum total of $200 million following the botched implementation of the program.
Sri Lanka was praised as a model ESG candidate for committing to carbon neutrality by 2050 and halving its nitrogen use. Today, it’s experiencing 54.6% runaway inflation.
The aforementioned Ghana, the Netherlands, and Sri Lanka case studies prove ESG policies have ruinous effects on political stability, economic growth, and inflation rates. And these won’t be the last countries with high scores to experience turmoil.
Canada, our neighbor to the north and holder of a 79.5 “E” score, has similarly proposed gutting fertilizer use by 30%. Naturally, this isn’t sitting well with Canadian farmers. And it shouldn’t.
Developing and developed nations need not rely on ESG metrics to measure success. Hinging economic performance on these subjective scores will incur harm and have no measurable positive impact on the environment.
Gabriella Hoffman is a senior fellow at Independent Women’s Forum and the host of the District of Conservation podcast. Follow her on Twitter at @Gabby_Hoffman.