Opinion & Analysis

On virtue, wars, and ESG values

Is it hypocritical for investment firms that claim to uphold environmental, social, and governance (ESG) values to do business with authoritarian states? Sergio Scandizzo argues that while ethical investing may prove to be an illusion in many cases, there are dangers associated with dividing the world into ‘moral’ and ‘immoral’ actors.

In a recent opinion piece in the Financial Times, Toby Nangle argues that asset managers, in particular those who pride themselves on upholding environmental, social, and governance (ESG) values, should stop bidding for work with authoritarian states that have a poor human rights track record. The list of such states is not only long, but also encompasses well over half of the wealth under sovereign funds management worldwide. No doubt such a decision would have considerable consequences on asset managers and countries alike.

Nangle has a point, and I wish him every success in his Principals with Principles project. Here, however, I would like to discuss the more general argument that dividing the world into ‘goodies’ and ‘baddies’ has been tried before, almost always with questionable results. It isn’t just that a Manichean view of the world tends to multiply people’s suffering – think of crusades, holy wars, the Cold War and so on. The main problem is that making decisions based on that distinction is strategically suboptimal in that it is both ineffective and very hard to enforce.

It is ineffective because it rarely generates the desired change in behaviour. Rather, it fosters a hardening of positions, makes dialogue more difficult, and in some cases hastens wholly undesirable outcomes. It is also hard to enforce because the criteria for the distinction are usually fuzzy and debatable. How do you decide who is worthy?

In the end, when we must decide to act in support or against, we decide based on our common objectives and on what we believe is the common good. We have decided in the West that supporting Ukraine is in our collective interest and Russia is a threat. We may also have opinions about the state of human rights in Russia, but that is not the key motivation for imposing sanctions and supporting Ukraine both financially and militarily.

Even within a nation, where there might be a more clearly shared view of what is moral and what isn’t, we isolate the really threatening individuals and put them in jail (and even in those cases, only after having followed due process), but do not try to dictate the broad behaviour of everyone else. Paradoxically, it is precisely totalitarian states that try to follow that route: divide the world, and their own citizens in the first place, into good and bad based on first principles. The results are under our eyes in Iran, North Korea, China, and many other places. That is why we isolate ‘rogue states’ – because they are a threat to overall stability, not on general moral grounds – and then by and large engage, or try to, with all the others.

Indeed, the definition of our objectives may well include the consideration that we might not want to encourage or support a government whose moral values are too distant from ours, just because it happens to serve our immediate geopolitical interests, because it may come back to haunt us. Think for instance of the support given to the Taliban during the Soviet invasion of Afghanistan. However, such considerations would still be, provided we are blessed with enough foresight, based on an appreciation of our specific long-term objectives.

The same issue plagues the ESG field itself: how do we decide what is ‘good’, meaning ‘sustainable’ or ESG-compliant? There is no definition that is not circular and no set of criteria which is both universally accepted and objective. The only real benchmark we have is the (difficult) agreement that something is in the common interest and needs to be acted upon. This is true of the EU and US reaction to the invasion of Ukraine as well as of the identification of carbon emissions reduction as a fundamental policy objective.

Such objectives may of course change over time, as proven by the recent decision of the German government to expand the largest coal mine in Europe as part of its response to the energy crisis caused by the war in Ukraine. They may also be influenced by the balance of power within and amongst countries.

Examples of the latter issue are the predominance of the United States in virtually all western decisions to engage militarily with other countries (like Iraq, Afghanistan and indirectly Russia) or the repeated inability of the UN Conference of the Parties (COP) to reach meaningful agreements on emission reduction because of the opposition of some of the largest and most powerful countries (at different times, the US, UK, China, and India).

However, this messiness of the decision-making process is the result of political engagement rather than a sign of its failure. As long as we can bring to this process original ideas and identify objectives based on dialogue, no matter how slow the progress and how imperfect the result, there is hope.

In his book After Virtue, Alasdair McIntyre argues, following Aristotle, that virtues come from understanding the telos, the purpose of human life, and that such telos is social rather than individual. Likewise, being sustainable means being aligned with specific purposes (such as reaching greenhouse gas emission targets). Such purposes are those painstakingly identified by our nations and communities of nations, much like, in a totally different context, upholding the resistance of the Ukrainian state.

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