Ever since humans emerged from the wordless void, we have been arguing. Some examples of statements that have caused arguments throughout history:
‘That cave is mine.’
‘That berry is poisonous.’
‘Global warming is anthropogenic.’
Whatever the argument may be, we have come up with ways to put the argument in a box; or in other words: to define it. Now, let’s turn our naturally argumentative natures towards ESG Investment.
What is ESG?
ESG investment is the hot topic of the day in the investment fund industry. For the average punter, ESG stands for Environmental, Social and Governance (investment); and relates to investment strategies that take, or don’t take, into account these factors.
To try and put it even more simply, ESG investment could quite easily be defined as ‘Ethical Investment’ (although there are some distinctions). Financial regulators are having a spot of trouble defining what ESG is, which is fair enough: it’s quite difficult to encapsulate the ethical hinterland of the entire world into a financial regulation.
The other problem with defining anything as ‘ethical’, is that whenever you say something is ethical; a cacophony of philosophers, political pundits, religious figures and journalists will suddenly burst through your front door demanding answers. This is not a new problem. This is a very old problem. They’ve been doing it for millennia. And as they say, if you can’t beat them, join them.
Let’s take a look at how ethical behaviour can be defined in the first place and then where we can go from there.
Defining Ethical Behaviour
In the early 4th and late 3rd centuries BCE, the Greek philosopher Plato said that living a virtuous life was the ethical thing to do. To put it simply, possibly too simply: ‘it’s the thought that counts’. This school of ethics has been refined and popularised by eminent modern philosophers like Immanuel Kant and is known widely as ‘virtue-based ethics’ or ‘deontology’ for the philosophy nerds; it widely underpins our legal systems.
Then, in the late 18thand early 19th centuries, the English philosopher Jeremy Bentham ‘invented’ utilitarianism; the early root of consequentialism. To put it simply, possibly too simply: ‘it’s the end result that matters, not how you got there’ (your high school maths teacher would be spewing). This school of ethics has become quite popular also and most of the field of ethics is covered by proponents of either school; or mixtures and subcultures of both. Anyway, you get the picture, now you want to know how this applies to ESG investing?
The Most Good You Can Do
The reason that this is related to ESG investment is that we need to decide how to define and measure ESG strategies in line with ethical standards, and if you can’t agree on ethical standards, then you have an issue.
Many organisations have attempted to define global norms and ethics that can be followed by governments and organisations to guide them to good conduct. A good example is the United Nations protocol on human trafficking.
A current and rising favourite is the Effective Altruism Movement, typified by Peter Singer’s 2015 book ‘The Most Good You Can Do’. In Singer’s book, he argues that altruistic giving should be subject to the same standards as pharmaceutical trials. Using a statistical approach as to how much consequential benefit every dollar is providing to people (and animals). In other words, a consequentialist approach. The issues raised in Singer’s book are being magnified by continuously growing global threats to humanity’s continuing existence, which include climate change and nuclear war.
The principles of effective altruism should be considered by regulators when defining ESG. ESG definitions should at least, in some way, use a statistical and scientific approach to measuring ESG strategies to make sure investment funds can do the most good with the money they have under their management; in other words to employ ‘Effective ESG Investment’.
This is a unique moment in history, regulators have the power to control where trillions of dollars will be spent, affecting all of humanity for the years to come.
For further reading on effective altruism and consequentialist investment:
Peter Singer ‘The Most Good You Can Do’ (2015) Yale University Press
Toby Ord ‘The Precipice: Existential Risk and the Future of Humanity’ (2020) Bloomsbury Publishing