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US Treasury Secretary Janet Yellen testifies before the Senate Banking, Housing, and Urban Affairs Committee hearing on The Financial Stability Oversight Council Annual Report to Congress, in Washington, DC, on May 10, 2022. (Photo by Tom Williams / POOL / AFP) (Photo by TOM WILLIAMS/POOL/AFP via Getty Images)
The weaponisation of ESG

The weaponisation of ESG

US Treasury Secretary Janet Yellen testifies before the Senate Banking, Housing, and Urban Affairs Committee hearing on The Financial Stability Oversight Council Annual Report to Congress, in Washington, DC, on May 10, 2022. (Photo by Tom Williams / POOL / AFP) (Photo by TOM WILLIAMS/POOL/AFP via Getty Images)

In a time of war and nationalism, ESG could find a whole new role

What do McDonald’s and Janet Yellen have in common? They’ve both recently announced the end of a 30-year experiment in globalisation. McDonald’s did so by saying it was selling its Russian burger business, but Yellen got there first. In an under-reported speech in April the US treasury secretary argued for “friend-shoring” supply chains to “extend market access [and] lower the risks to our economy”.

If “friend-shoring” sounds like jargon, it’s important jargon. It means securing your supply of vital goods and commodities from reliable partners who share your values, rather than simply from the lowest bidder, and taking it away from others. It raises a key question – how; how do you justify your new, exclusionary sourcing strategy to the world? – and it turns out a useful tool is at hand. It goes by three familiar initials: ESG.

For investors and compliance people, ESG – for environmental, social and governance principles – is the great umbrella acronym that aims to measure businesses by the good they do rather than the money they make, but all too often ends up only causing confusion. No matter. It’s now being weaponised to serve the most pragmatic of masters: politicians pursuing emergency energy and security policies.

This is not a forecast. It’s already happening. Within days of Russia’s invasion of Ukraine, Finland had extracted Rusatom, the Russian nuclear energy supplier, from a nuclear power contract years in the making and billions in the hole. The official reasons given were the delays and a problem with construction permits on account of violated international agreements; G for governance. The real reason was the invasion.

Before that, America’s Uyghur Forced Labour Prevention Act (UFLPA) – signed by President Biden in January – required any manufacturer based in Xinjiang or using suppliers there to show they don’t use forced labour. This could have a serious impact on the US renewable energy rollout, because western China accounts for the bulk of the world’s supply of photovoltaic solar panels. US tariffs already created a barrier to the import of Chinese panels, but the new law could block their use entirely in the US – and it’s also expected to apply to Chinese-owned firms used to route Chinese products to the US via other countries in the Asia-Pacific region. S for society takes its place at the high table of geopolitics. 

Inconsistencies between the three pillars of ESG have long been acknowledged by those who have to work with them. Depending on which of two major ESG ratings firms your firm chooses to follow, Tesla is either the highest-scoring carmaker or the lowest. Both firms publish their methodology; they just don’t agree on whether battery disposal should be included. 

Absurd? Absolutely, but these inconsistencies haven’t prevented ESG becoming the major business strategy of many an asset manager and financial CEO. In corporate and financial life, ESG is here to stay, and it’s becoming embedded in international politics too, repurposed as a rationale for energy security in a time of war. 

The term “friend-shoring” evokes warmth, but uttered by Yellen as US policy it was a serious threat. She was speaking after representatives of a majority of the world’s population had failed to support a UN vote condemning Russia’s invasion. Days later, here was a representative of wealth and power using ESG language to put those nations on notice of US priorities. 

As with so much after the Russian invasion, energy and foreign policy goals have been upended. Facing new imperatives, it is already clear that the politicians seeking a new world order will weaponise ESG’s powerful influences in the service of their strategic goals.

Ashur Nissan is a partner with Kaya and a member of Tortoise

Photograph Tom Williams/AFP/Getty Images