Colonialism by ESG

The Press Freedom Index released last month by Reporters Without Borders (known by its French acronym RSF) had yet again raised eyebrows with India dropping to a rank of 161 (out of 180 countries) from 150 in 2022. In common with several such opinion-based rankings, this index too stretches credibility by placing India below conflict-ridden countries such as Sudan (148), Pakistan (150) and even Afghanistan (152). This article looks into the source of these systemically biased reports, and shows that it is part of a well-coordinated web of global funding that is deliberately hardwiring certain agendas into the way the world works.

As many readers will have noticed, there has been a spate of perception-based rankings such as V-Dem’s Democracy index, Economist Intelligence Unit’s (EIU) Democracy Index, and Freedom House’s Freedom in the World Index that have been systematically lowering India’s rankings in recent years. Their laughable methodology and blatant biases have been highlighted previously in a working paper titled ‘Why India Does Poorly on Global Perception Indices’ https://shorturl.at/eozX7 published in November 2022 by Economic Advisory Council to the Prime Minister. Several other researchers have also published articles criticising these rankings. The focus of this article, however, is not the first-order biases in methodology but the broader forces that guide such narrative-building.

There may be a temptation to just ignore such perception-based rankings as mere opinions of a few think-tanks, but these indices are insidiously expanding their influence on real-world decision-making. Over the years, these indices have come to account for around 20% of the weightage in sovereign ratings. However, their importance is likely to increase exponentially with the growing imposition of Environmental, Social and Governance (ESG) norms.

ESG norms started innocuously out of the United Nation’s Principles for Responsible Investment Report 2006 that envisaged sustainable standards binding on corporations and businesses for ethical disclosures. However, these norms have since been hardwired into policy. One example is Europe’s Corporate Sustainability Reporting Directive that came into force in January 2023. These norms are similarly being expanded to cover all manner of trade and investment decisions, including those related to sovereign countries.

The World Bank has become one of the biggest champions of the ESG approach. Its Sovereign ESG Data Portal provides a database widely used by investors, and international agencies to assess country risk. The institution also publishes the World Governance Indicators (WGI) made up of five sub-indices for Rule of Law, Voice and Accountability, Regulatory Quality, Control of Corruption and Government Effectiveness.

Note that the World Bank builds the WGI database by aggregating indices from Freedom House, V-Dem, EIU, Human Rights Measurement Initiative, RSF and so on. The sub-index for Voice and Accountability, for instance, uses the Press Freedom Index from RSF mentioned at the beginning of this article. By using indices from these sources, World Bank is effectively giving them legitimacy.

Various commercial organisations like J.P. Morgan, Moody’s and Morgan Stanley have also developed proprietary ESG scoring frameworks. It may sound like this implies many independent sources of information and analysis, but in reality most of them just use inputs from the World Bank’s database or indices from the same pool of think-tanks and NGOs. This is explicitly laid out by JP Morgan Asset Management’s “Sovereigns and ESG” report published in November 2022 (https://shorturl.at/rsxLP).

As one can see, it is the same opinion-based indices from a small pool of institutions that keep circulating in different combinations. The field is even narrower when one investigates the funding sources of these think-tanks. We found that most of them were directly or indirectly funded by Ford Foundation, USAID and, most importantly, billionaire George Soros’ Open Society Foundation (readers can easily confirm all this on their own from the relevant websites). Whatever one thinks of these organisations, there is clearly a problem of concentration of power.

In other words, this is a multi-layered system, analogous to the layering of shell companies used to launder black money, that allows the biases and agendas of a tiny clique to be hard-wired into concrete decision-making frameworks across the world. Once baked into policies and norms, these biases will continue to be impact decision-making into perpetuity unless deliberately reversed. This is a form of neo-colonialism.

Readers should note that we are not against having some broad norms around environmental, social and governance issues. The problem is that this framework is being imposed without wider consultation, and seems to be controlled by a very small clique based entirely in the North Atlantic.

One way forward is to take the ESG discussion to a wider forum where both the norms and the sources of data can be publicly scrutinised. Similarly, there needs to a wider pool of transparently funded agencies that monitor and certify compliance. This must include organisations that are based in countries outside of the North Atlantic. ESG norms make much of transparency, inclusiveness and accountability – perhaps they can start by applying the principle to themselves.

(Sanjeev Sanyal is Member, and Srishti Chauhan is Young Professional, Economic Advisory Council to the Prime Minister (EAC-PM)