ESG: Reconciling “Singularity” and Collective Debate

The complexity of the environmental, social, and governance (ESG) transformation doesn’t allow for a simple solution. But a new depth of awareness and cultural understanding is now helping shape this process, with philosophers and sociologists illuminating many underlying issues.

We have an urgent need for action on the environment. The good news is that this consensus is starting to be mirrored in financial sector activity. ESG-managed investments have grown by 36% in the last two years. One estimate is that the volume of ESG-managed investments will grow to over USD53trn globally by 2025, 25, equivalent to a third of all assets managed by the financial sector  – just to mention this number as a gauge for the development while knowing the current shortcomings of measurement and disclosure. The bottom-line is, the development seems to be clear.

Why is ESG investment growth accelerating? This is not just a matter of economic factors, or simple trend following. You also need to look at underlying social factors. 

21st century society has been described as being in state of “late modernity”.  The sociologist Andreas Reckwitz (Reckwitz, 2019) has argued that multiple factors in today’s economies and society lead individuals to pursue their own “singularity”. We have a set of beliefs about what we, as individuals, can achieve and we want to have some "impact" on the world: ESG investing may be part of how we do this.

Pursuing Reckwitz’s “singularity” implies that we have the economic ability, the freedom and the time to act this way.  Many people do not enjoy this. But even in emerging economies, increasing prosperity is also allowing greater freedom around decision-making.

We do not, however, all start from the same place. In one sense, the options of emerging economy citizens are already narrower. There is an implicit concern that industrialized nations may have imposed a limit on the future growth of the emerging economies through their own past growth and the associated consumption of resources. This situation may be seen as unfair, particularly as developed economies are unlikely to make amends for past actions. 

The 20th century philosopher Hans Jonas, an early exponent of the need for environmental action, did indeed argue that a sense of responsibility (for the environment) should not be based on reciprocity. As he put it: “act so the effects of your action are compatible with the permanence of genuine human life” (Jonas 1984).

But, even if we accept that responsibility comes without reciprocity, environmental actions need to be seen as effective and fair. There are several intrinsic problems here.

First, environmental choices are not being made on the basis of perfect information. Digitalization and much greater data collection is of course steadily making clearer the costs of failure to act. The work of climate scientist Friederike Otto, for example, shows that it is possible to attribute specific weather events to climate change. But we are still some way from fully identifying and resolving the great tensions between the costs and the opportunities of the necessary socio-economic-ecological transformation. 

Second, we are not in a static or wholly predictable situation. We need to anticipate more asymmetric shocks not directly driven by the economy.  The beginning of the 21st century was characterized by economic and market shocks (e.g. the Global Financial Crisis) and we developed policy tool-kits to deal with them. Now we have to learn how to deal with exogenous shocks from environmental sources – collaborating to find effective solutions to new problems. In Reference to the Philosopher Nick Bostrom, Nikil Mukerji and Adriano Mannino speak of this as a "philosophy with a deadline", because avoiding certain tipping points is critical. One danger here is that we are bounced into tactical shifts in policy – and lose sight of the overall strategic direction.

Third, we face a need for rapid change on environmental policy– while realizing that social structures and attitudes can be very slow to change. Our international social infrastructure for dealing with global collaborative action (e.g. the United Nations and the Bretton Woods economic institutions) is also now over 75 years old. 

Faced with these three problems, but aware of the high social costs of inaction, we have fallen back on regulation to ensure change. In Europe, such regulation includes the so-called EU Action Plan with the EU Taxonomy and the Sustainable Investment and Finance Disclosure Regulation (SFDR), The basic idea of this may be followed by many Asian economies. In the U.S., on the other hand, the focus is first on increased climate reporting by companies, in line with the Paris Agreement. Both represent different ways to find a way forward to a similar endpoint in challenging circumstances.  

Regulation is therefore necessary in the current situation but can only be one part of the solution.  

Consider for example the situation in the financial industry. This sector is a regulatory agent of this transformation - whether it likes it or not. In the past, financial institutions’ investment assessments were primarily done via financial ratios, such as the price/earnings ratio or the price/book ratio. Today, they also look at metrics including non-financial factors (and if such assessments aren’t available, they need to make them visible and understandable as data attributes). From the global financial crises, the sector knows the importance of governance. And it also knows how significant the social dimension is, for both corporates and governments.

Regulation provides a way through this complex process, but one danger is that it imposes a single point of view and implies a certainty that does not exist. We do instead need diversity – in terms of discussion, views and approaches. Diversity and diversification are terms often associated with the financial sector (e.g. a hedge against risk in portfolios) but, more fundamentally, diversity is nature's way of positioning itself to be sustainable, innovative and protected against risk.  As noted above, we are not operating with perfect information and the current situation is not predictable: sustainability, innovation and risk management are essential to any policy response. 

In this situation, reconciling the desire for “singularity” and an appropriate response can be difficult. We therefore also need to ensure that regulation does not stop participation in collaborative activities to establish shared goals and intentions – the “shared intentionality” identified by psychologist Michael Tomasello and others.  We know that effective collaboration requires cultural learning and subtle intention reading, but also some motivation to share our beliefs with others. ESG debates must encourage, not threaten, such behaviour.

Markus H.-P. Müller is Global Head of the Chief Investment Office International Private Bank, Deutsche Bank AG. Markus has held teaching posts in corporate finance and economics, being a visiting scholar at the Frankfurt School of Finance and the University of Bayreuth as well as at the Banking and Finance Academy of the Republic of Uzbekistan in Tashkent. His main research interests lie in the structural transformation of economies and societies as well as in the area of ​​sustainability. Markus authored several books and articles on the transformation of society and economies.

This work is solely the author's own opinion and is produced independently of his role at Deutsche Bank Group

Photo by Thijs van der Weide

References

Jonas, H. (1984). The Imperative of Responsibility: In Search of Ethics for the Technological Age. Chicago Press, 1984.

Reckwitz, A. (2019). The Society of Singularities. On the Transformation of Modernity. Cambridge: polity, 2019.