Why is so much âsocially responsibleâ investment going to autocratic countries? Marcos Buscaglia on one of the financial worldâs big blind spots. â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â Well and Good Why is so much âsocially responsibleâ investment going to autocratic countries? Marcos Buscaglia on one of the financial worldâs big blind spots. Adam Nir In an appeal to environmentally conscientious investors, Turkey issued a US$2.5 billion green bond last month, attracting a rush of global interest and selling to investors predominantly in the United States, the United Kingdom, or Europe. A green bond is a financial instrumentâand a category of socially responsible âESGâ investmentâused to raise capital for environmentally sustainable projects. It all coincided with a tough reelection campaign for Turkeyâs president, Recep ErdoÄan, whose rule has become increasingly autocratic since he took office in 2014: After a coup attempt in 2016, ErdoÄan purged his critics from the judiciary, military, police forces, civil service, universities, and news media. The U.S.-based Freedom Houseâwhose annual report is broadly considered a gold standard on political liberty in the worldâhas meanwhile downgraded Turkeyâs ranking from Partly Free to Not Free; and the Committee to Protect Journalists now considers it the planetâs fourth-worst jailer of reporters, behind Iran, China, and Myanmar. So why are socially responsible Western investors now bankrolling Turkeyâs government with an ESG bond? Marcos Buscaglia is an economist, the former head of the Latin America economics team at Bank of America Merrill Lynch, and the author of the forthcoming Beyond the ESG Portfolio. How Wall Street Can Help Democracies Survive. To Buscaglia, the answer is, for every ethical issue they may be considering, theyâre not thinking about democracy. This article is part of a [series]( in partnership with the [Human Rights Foundation](. Buscaglia will be a speaker at the [Oslo Freedom Forum]( in June. J.J. Gould: Letâs start by touching on the technical question here: What are ESG investments, exactly, and how do they work? Marcos Buscaglia: The idea of socially responsible investmentâthe idea that ethical considerations, beyond financial returns to shareholders, should also govern investment decisionsâhas been a theme forever. In the West alone, thereâve been major campaigns in recent decades to promote divestment from Apartheid South Africa, for example, or tobacco companies. ESG indexes are different in the sense that they represent a whole new layer of investment analysis. They say, yes, investors will want to consider all the customary factorsâfinancials, productsâ market fit, projected cash flows, and so onâbut they can now also look systematically at other factors that help them align their investments with their values. The framework for these indexes is called âESGâ for Environmental, Social, and Governance. Essentially, the framework evaluates the sustainability and broader ethical impact of an investment. Environmental factors include things like carbon emissions, resource usage, and waste management; social factors, things like a companyâs relationships with its employees, customers, or communitiesâincluding labor practices, diversity and inclusion, and so on; governance focuses on things like leadership, transparency, and accountability in decision-making processes. Gould: Thinking about Turkeyâs big green bond, then, whatâs the problem thereâassuming itâs marked for legitimate green initiatives? Investment going to them is good, no? Advertisement Buscaglia: There are two problems. One is with what we know: This bond supports an autocratic regime. Itâs a government bond, issued by an autocracy. I like green bonds, you know, but I donât like that. The second is with what we donât know: Just over a month before an election everyone thought ErdoÄan would lose, his government issued the equivalent of $2.5 billion. Then, he won and forced a runoff election, happening this weekend. We know ErdoÄanâs campaign was spending like crazy, but we donât really know what money was flowing into it. Like many countries where democracy is weak, Turkey formally holds elections, but it doesnât have liberal rights, or the rule of law, or transparency in any sense that would allow us to see where all the money from its green bond is going. And of course, money is fungibleâso even if it was properly directed to green projects in this case, it will also have liberated funds from the budget of a government thatâs under the control of a ruthless autocratic leadership. Either way, this big green bond ends up being a big greenwash. Gould: Because Turkey is autocratic, we know its green bond is supporting autocratic rule; and also because itâs autocratic, thereâs lots we donât know about how the bond is supporting autocratic rule? Buscaglia: Exactly. Gould: How have considerations related to democracy figured into ESG ratings, then? Buscaglia: Virtually 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 human rights will appear every now and then. But democracy is almost completely absent. Basically, ESG does not take democracy into account. Weâre talking about Turkeyâs green bond as an example of what can happen with the exclusion of democratic considerations from ESG ratings. Hereâs anotherâto me, very strikingâexample: J.P. Morgan has indexes of government bonds that are very popular, very widely tracked. Theyâre very good. And they include ESG-corrected indexes. The day Russia invaded Ukraine, Russia had a bigger share in J.P. Morganâs ESG-corrected index than it did in the non-ESG-corrected one. So as an investor in government bonds looking at J.P. Morganâs indexes, youâd have ended up with more Russian bonds if youâd taken ESG considerations into account than if you hadnât. NASA / NOAA More from Marcos Buscaglia at The Signal: âIt can be hard to know the answer to a question no oneâs asking. But to date, thereâs been no real investor backlash on the issue of democracy. And thereâs also beenâI think itâs important to noteâan assumption among investors that autocracies are generally less messy than democracies, that theyâre more orderly, and that they ultimately deliver better returns. So if those returns come at some cost in terms of democratic standards or the preservation of human rights, investors have been inclined to look away.â âLuis Martinez of the University of Chicago looked around the world at the relationship between nighttime luminosityâthe lights from cities that satellites imaging can pick upâand gross domestic product, GDP, the standard 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 House. And what he found was that autocratic regimes were on the whole overstating their GDP growth.â âIf you look at the global pattern of populist autocrats taking powerâtypically after bad economic timesâthey tend to consolidate their power with economic policies that make them popular. Well, for that, they need money. And itâs predominantly international investorsâabove all, American and European and Japanese investorsâwhoâre providing it. If these autocrats didnât have access to those funds, would they have been able to survive for so long?â [Continue reading ...]( [The Signal]( explores urgent questions in current events around the worldâto support it and for full access: [Subscribe now]( The Signal | 1717 N St. NW, Washington, DC 20011 [Unsubscribe {EMAIL}](
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