Democracy before ESG | ASEAN Post
Amid growing concerns about climate change and social unrest, institutional investors are increasingly applying environmental, social and governance criteria in their portfolio decisions. Yet while ESG factors are important for investors to consider, the new focus risks overshadowing an even bigger problem: the role that companies play in the democratic process.
The Universal Declaration of Human Rights (article 21, section 3) states that “The will of the people shall be the basis of the authority of government. This will will be expressed in periodic and honest elections.
Democracy is therefore a human right, which means that the first social responsibility of companies – whether it is a sole proprietorship or a multi-billion dollar company – is to refrain from undermine democracy, whether at home or abroad.
Many will take this point as obvious or irrelevant. What do business have to do with democracy? In fact, many companies play a leading role in the distortion of the democratic process, whose proper function is to transform popular will into legislative action. Let me illustrate this point with examples from the United States (US), which was once considered the most advanced democracy in the world.
In 2019, the Republican-controlled Ohio state legislature passed Bill 6, which provided $ 1 billion in grants to bail out FirstEnergy Solutions, a nuclear power plant subsidiary of a utility. electricity. The bill was hardly an expression of the will of the people of Ohio.
On the contrary, a black money group, Generation Now, has since pleaded guilty to carrying out a broad bribery scheme to gain approval for the bailout. Generation Now has supported the campaigns of 21 different state-level candidates, including House Speaker Larry Householder, who also received over US $ 400,000 in personal benefits.
And as if that wasn’t enough, when Ohioans began collecting signatures for a referendum to abolish HB6, Generation Now launched an ad campaign claiming the Chinese would take control of the state’s electricity grid. if the repeal succeeds. Local media also discovered that the group had “hired ‘blockers’ who followed, surrounded, harassed and (in a few cases) physically beaten the petition collectors.”
It was later revealed that Generation Now was founded with US $ 56.6 million from FirstEnergy Solutions, but this scandal would never have even come to light without an investigation by the Federal Bureau of Investigation (FBI).
Since this episode seems to belong more to 1950s Guatemala than to 21st century America, can we dismiss it as an isolated case, limited to a bad business, a state, or just the Republican Party? Unfortunately, we cannot. It is a truism in American politics that, “As Ohio goes, so is the nation.”
In neighboring Illinois, Exelon Corporation agreed to pay a fine of US $ 200 million for a long-running bribery program in which the power company gave jobs and contracts to associates of the president of the Illinois House, Michael Madigan, a leader of the state Democratic Party. Again, the only unusual aspect of this story is that the perpetrators have been arrested.
A recent article in the Quarterly Journal of Economics provides systematic evidence of the many ways in which corporate money is routinely funneled through nonprofits to influence political outcomes behind the scenes. The actions documented in the document are legal, but that does not make them socially responsible.
Corporate influence on the US political process not only weighs down our public finances and devastates our environment; it is also fundamentally undermining our democracy. Democracy is worth preserving if it fulfills the function of transforming voters’ preferences into politics. But if it fails, why keep it?
After all, democracy is neither efficient nor cheap to maintain. If voters cannot trust their elected representatives to represent them, they will support extremists who are ready to demolish the corrupt system.
Given the stakes, not interfering with the democratic process should be the primary social responsibility of any business. ESG considerations are important; but if a company fails on criterion D (democracy), it doesn’t matter how well it seems to be performing on ESG metrics.
As the FirstEnergy and Exelon scandals show, the risks of playing dirty can easily overwhelm the benefits of so-called ESG alignment. On the other hand, if a company meets its D requirements but does not meet ESG requirements, political governance can still be relied on to help resolve the remaining issues. This is why D must always come before ESG.
The first principle of responsible investment is therefore to ensure that companies do not violate or rewrite the rules of the democratic game, whether at home or abroad. It’s perfectly doable, and it starts with requiring full transparency about where the company’s money is spent. The 2010 Citizen United decision of the United States Supreme Court may have paved the way for unfettered corporate money in politics, but it does not protect the right of companies to make such expenditures without notifying them. their shareholders.
A public initiative to force this kind of transparency is gaining momentum. On average, support for shareholder proposals requiring the disclosure of political expenses fell from 36.4% in 2019 to 48.1% in 2021.
If the Big Three institutional investors – BlackRock, Vanguard and State Street – endorse this principle, it could become the norm for all large American companies. Would full transparency prevent companies from distorting democracy? This would go a long way, as it would expose their corruption (whether legal or not) not only to their shareholders, but also to their customers, employees and regulators.
The time to act is now. Tomorrow it may be too late. – Project union