Sustainability Rankings: Goodness Corporates Can Buy

Until 2030, the United Nations Sustainable Development Goals will be the established new mantra for global emancipation and corporate-state altruism. These 17 goals and 169 targets that range from eradicating poverty and sanitation to gender equality, infrastructure and renewable energy are successors to the UN Millennium Development Goals, whose deadline closed on a not-so-successful note in 2015.

Now, the new sustainability metric offers yet another “fresh perspective” to companies on how they can convert their mandate to be good corporate citizens into a growth opportunity. In other words, how they can help their top-lines and bottom-lines. The new kid on the corporate-sustainable-development-profit-generation block is ESG or Environment, Social and Governance rankings, a stock market tool. In essence, ESG ratings, rankings, products and services are old wine in a new bottle, to help companies capitalise on their prosocial initiatives.

Sustainable Development genesis:

Apart from the gradual erosion of culture and native identity, colonialism stood strongly with trade appropriation by way of exploration and exploitation. Comparative advantage was reduced to absolute advantage as empires took possession of colonies and controlled their trades through monopolies over cotton, tea, sugar and slaves. This pushed growth in the colonies back by a century even once the imperialists left. For instance, one of the main drivers of the slave trade was sugar production, which came to be known as White Gold for the windfall profit generated in the trade.

By the turn of the early 19th century, statistical firms rose to prominence across Europe, collecting, tabulating and setting prices. As Foucault argues, statistics allowed technocrats to define a “population”, thus shifting the model of government away from the family towards the state.

When in the 1950s countries became independent through freedom movements, it was time to bring the agenda of development back to the table. In 1972, the historic Declaration of the UN Conference on the Human Environment was adopted in Stockholm and incorporated the term “sustainable development” for the first time in an international conference. The Rio Declaration was adopted during the 1992 UN Conference on Environment and Development, which reinforced environmental governance while ensuring that countries conducted environmental impact assessments (EIAs) as a policy. It also promoted public participation in managing natural resources and incorporated laws regarding liability and compensation for victims of pollution and other environmental damage. To achieve this mandate, countries would be ranked on their performance on these and other deliverables.

Regulatory capitalism and the metrics ecosystem:

Countries needed capital as they began to chart their new course of development. The World Bank and International Monetary Fund came to the rescue, bringing along long-term loan conditionalities. Classification as developed, developing and least developed countries became the hallmark of global divisions. A circular argument was then propagated: It began by saying that the transparency and accountability of borrowing countries had to be tested before they got capital inflows, for which they had to be taught financial market civilisation so that they could gain foreign investor confidence and thereby get access to ever-expanding credit lines. “Compliance” and “ease of doing business” became paramount indicators, considered essential to lift fledgling economies from recession and encourage privatisation.

This form of regulatory capitalism led to the rapid proliferation of indicators, ratings, rankings, indices, league tables, scorecards and social labels to “evaluate and monitor” regulatory targets and entice countries to adopt so-called international market discipline—and surveillance. This sorting, naming, numbering, comparing, listing, and calculating practice is now an annual activity conducted by agencies, organisations and watchdogs who have created a culture of continuous comparison and hierarchy between countries.

Some prominent “regulatory rankings” include the Access to Nutrition Index, Access to Diagnostics Index, Responsible Mining Index, Access to Seeds Index, Aid Transparency Index, Carbon Disclosure Project, Corporate Human Rights Benchmark, World Benchmarking Alliance, and the Access to Medicine Index. Such lists of rankings now shape the global outlook on whom to do business, based on calculated “results”.

Rankings have the power to alter perceptions about a brand, change consumer behaviour and create renewed loyalty. They have this power whether it is a ranking by country, region or the world. It is a hallmark of the neoliberal order that a certain “score” can come to define both presence and status, similar to caste and class. Rankings are the market’s version of social stratification. While merit has been typecast as an elite construct, the rankings keep expanding their scope of operations.

For example, consider the latest vaccination rankings which penalise states that may simply lack the capacity to handle mass-vaccination programmes by de-prioritising allocations to them vis-a-vis the more successful states. Similarly, the Fifteenth Finance Commission arbitrarily determined a new way to evaluate state performance when it decided to use population data from Census 2011 instead of the 1971 population figures to determine states’ shares in the central pool. Changing the year of reference fiscally penalised Southern states, for in the years between 1971 to 2011, their population had declined as they successfully implemented the Centre's family planning initiatives, while the Northern states lagged.

From academic institution rankings to policy planning indices, India continues to rate and report states performance across various indicators, from Swachha Bharat rankings to corruption indices and ease-of-business. This is changing “cooperative” federalism to competitive federalism, a more market-based framework. India Inc also leverages rankings, from CSR to Human Resource management.

Greenwashing and ESG ratings:

What firms do after profits are generated has come to be known as CSR [Corporate Social Responsibility] and what firms did, before they generated profits, to “green their business strategies” is now heralded as stewardship of sustainability. How have these rankings affected sustainability credentials? While companies were expected to cause no harm to stakeholders through their corporate dealings, CSR generated social impact into actionable insights for better recall and visibility. In essence, the funds earmarked as “marketing budget” in a company to lift the brand reputation and goodwill can now be encashed by their “prosocial” conduct without actually using any funds.

The ethical stock market trade emerged when good corporate governance was packaged as an ESG product. Green investing has become the new norm. According to the National Stock Exchange NIFTY100 ESG Index, "Environmental, Social and Governance based investment strategy has gained popularity among investors globally. The underlying drive behind ESG theme-based investing lies in generating superior risk-adjusted returns from socially responsible, environment-friendly and ethical firms. Companies that are involved in any major ESG controversy shall not be considered for selection in the index... Companies engaged in the business of tobacco, alcohol, controversial weapons and gambling operations shall be excluded.’

In short, linking responsibility and profitability into ESG investing by selling ethical corporate action as a security product aids wealth creation. ESG variables are complex and change according to the industry, and there is no one-size-fits-all approach. It prevents a universal ESG framework, or for that matter, a robust audit covering all domains such as modern-day slavery (child labour, forced labour), human rights (wages and safety at workplaces) and sustainable procurement across supply chains.

Prima facie, this serves as a signal to companies that intend to go public to focus on non-financial disclosures. But are asset managers and fund houses interested in sustainable performance and ethical investors’ portfolios? According to a Harvard Business School study, the vast majority of investors are motivated by financial rather than ethical reasons in using ESG data. ESG information is material to investment performance. However, what information is material likely varies across country (in some countries water pollution is a more serious issue than corruption); industry (an industry affected dramatically by climate change versus an industry affected by violations of human rights in the supply chain); firm strategy (firms that follow differentiation versus a low price strategy) and so on.

Another study by HEC Paris complements these findings by looking at Dow Jones Sustainability Index (DJSI) wherein a firm’s addition to, continuation on, or deletion from the DJSI had little impact on its stock prices and trading volumes when compared to other firms in the same industry with similar profitability. Furthermore, continuing on the DJSI attracts more attention from financial analysts, and leads to more reports being written about such firms. It also leads to an increase in the percentage of shares held by long-term investors.

So, the bottom line: ESG ratings and sustainability indices are repackaged products of “corporate goodness” in a purchasable form. Rankings can affect not just the market, but our lives, by altering our perceptions about what is ethical, what is not.

The author is an assistant professor at St Joseph’s College of Law, Bangalore. The views are personal.