ESG (environmental, social, and governance) factors vary considerably from country to country. In some cases, ESG factors can be interrelated, and they can also be challenging to quantify and assign monetary values to.
The issue of ESG has become increasingly important to governments, and it is now back on the radar after the IPCC report on climate change in 2021. ESG issues threaten society’s ability to function, and the government’s strategy will affect how the organization operates. Whether through a corporate responsibility policy or one focused on ESG performance, the government’s actions will impact society.
Impact on investors
The current trend toward protectionist policies may benefit confident investors, particularly those companies that prefer less foreign competition. Some investors benefit from trade barriers that keep out foreign competitors. Still, overall, protectionism is detrimental to the economy and stock market, while other investors benefit from the restriction of foreign trade. Nonetheless, big companies, which are often multinationals, risk losing profits from protectionism. These companies often conduct cross-border operations, and a lack of access to foreign competition is bad for their bottom lines.
While critics claim that socially conscious investing is at odds with investment managers’ fiduciary duties, various strategies aim to balance personal values and risk aversion. A top-down ESG approach prioritizes financial returns over ESG factors, while bottom-up ESG strategies focus on companies with high ESG scores. This strategy can also lead to better long-term investment results.
Impact on democracy
While globalization has produced many winners in finance and trade, it has also left many Westerners behind, particularly the middle class. In addition, the rise of cheap labor in emerging markets has resulted in the displacement of expensive jobs in developed countries. Such trends have led to public anger and a new global wave of protectionism.
Impact on national sovereignty
As countries strive to improve their environmental, social and corporate performance, many take protective measures. However, these measures can have unintended consequences. For example, trade protectionism could discourage the free flow of foreign direct investment, hampering economic growth. It may also hinder the creation of global production networks that require the free movement of goods and services. Therefore, it is essential to distinguish between protectionist measures meant to safeguard national interests and those detrimental to them.
While some argue that these policies are beneficial to national economies, others have argued that they may limit policy autonomy and supersede nation-state sovereignty. Alternatively, state sovereignty may have an essential non-instrumental value. Indeed, preserving local policy space could lead to more appropriate outcomes than those produced by international standards.
Impact on corporate social responsibility
Companies should consider ESG issues during their valuation process. While ESG risks are not always material, investors must consider their impact on society and the environment. The materiality of an ESG issue should be assessed in terms of its effect on external and internal value creation. This includes a company’s efforts to make decisions to improve its social and environmental performance. Sustainability issues also enhance or diminish the corporate value.
As ESG issues continue to gain importance, many executives and investors pass on companies that don’t engage in responsible business practices. These executives and investors are risking their investments and the loyalty of top talent. ESG initiatives are also attractive to deep-pocketed investors and consumer mandates.