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Fabián Chahin

Economist, Banco Nacional de Bolivia


Economics or ESG? Perhaps It's Not about the Mouse's Name, but its Ability to Catch Mice

Economics or ESG? That is the question for current CEOs. On one side, there's the pursuit of positive financial outcomes amidst rapid change, obsolescence, and multifaceted uncertainty. Not to mention the noticeable volatility in consumer preferences, which increasingly untethers them from brand loyalty. On the flip side stands the imperative for ethical, fair, equitable, transparent, and accountable conduct towards all stakeholders. While financial and economic metrics are widely embraced, ESG metrics provoke skepticism. However, perspectives are evolving.

Critiques of the ESG framework have always been present and will persist. A notable surge, especially in the U.S. but with global repercussions, aligns with electoral debates, indicating ESG's politicization and the divide it creates between its advocates and opponents. This polarization is significant, considering recent studies show the political cycle influences societal beliefs about issues like climate change, despite overwhelming scientific consensus (99% according to Cornell University research).

Yet, whether ESG practices benefit the economy—including growth, employment, investment, and consumption—remains unclear. The dominant economic model for analyzing fluctuations through micro-foundations doesn't inherently require a private (or public) financial sector. Even as some extensions have incorporated aspects like sticky prices and wages, consumer differentiation, a monetary authority, and even a banking sector, the financial sector's effects on aggregated economic variables remain vague. This ambiguity led to the recent Nobel Prize in Economics awarded to Bernanke, Diamond, and Dybvig for their efforts to clarify the financial sector's intertwining with the broader economy, especially post-2008's Great Recession. The economy's interaction with ESG poses an even greater challenge due to the complexity of measuring elements like natural capital, pricing its services, and reflecting the intricate human and environmental interactions. However, technological advancements in the areas of data analysis and IA promise to shed light on these issues.

For now, current data suggest a correlation between companies with coherent ESG policies and their financial performance, alongside a premium for green investments (“greenium”) specially in developed countries. However, caution is advised due to the need for standardized, harmonized metrics capable of bridging significant gaps across sectors, countries, and rating agencies. Esteemed academics are addressing this challenge, as seen in initiatives like MIT's “The Aggregate Confusion Project” and influential works on Corporate Sustainability by scholars like George Serafeim and Aaron Yoon.

The complexity of measuring ESG's impact does not diminish the undeniable significance of corporate ethics in business development. The importance of ethical practices is increasingly recognized within companies and by investors, as well as the demand from customers for commitment to communal well-being, moving beyond traditional market equilibriums or efficient market hypotheses.

Questioning whether ESG adoption guarantees business success or economic growth might miss the point, as it suggests a simplistic linear relationship between complex, interrelated factors. Instead, we can see it the other way around: leading companies that tend to achieve the best economic outcomes, are often the ones that excel in incorporating ethical business practices, corporate responsibility, sustainability, ESG, or whatever name they adopt, into their core operations. By the way, the debate over terminology, which appears to be a significant point of contention, is being addressed by approaches suggesting a shift towards “rational sustainability” to clarify political ambiguities.

Looking ahead, two trends emerge: the deepening pursuit of ethically generated profits and the potential evolution of both the nomenclature and metrics of ESG. Ultimately, the efficacy of these practices will be judged not by their label but by their tangible economic, social, and environmental benefits. So, perhaps it's not about the mouse's name, but its ability to catch mice. Pragmatism is what is required, especially in developing countries, where very disparate realities and extreme polarization are encountered, compromising sustainable development in the quest to become protagonists of the world’s energy transition.


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