Making sense of the ESG mania: part 1, v 1.0

INTRODUCTION

01. THE GLOBAL POLICY space since Stockholm conference — exactly half a century ago — has recognised that ecological sustainability of the relevant ecosystems are necessary for sustaining a given economic system (say Si). Such ‘relevant’ ecosystems can be identified through two ways: the direct one includes all such spaces from which material and energy inputs of Si are being drawn and pass through (“source” function of Nature); the production in the Si in turn can release by-products (“sink” function of Nature) that may affect the sustainability (i.e. functions as well as resilience) of these ecosystems. Latter, in turn, can affect not just Si[1] but Sj, Sk and so on through linkages among economic systems. For example, Si may belong to the supply chain of Sj, or, Si and Sj can be connected through ‘backward’ and ‘forward’ linkages.

02. INTERCONNECTION between economic systems ensures that a perturbation in one will result in some ramifications in the ‘relevant’ others. The spread and strength of the ‘impact’ — even then — will depend on the nature of economic or ecological connectedness, but in real terms. This realness limits the spatial spread of the impacts and influences between and on each other, among the economic and ecological systems. While the identification of causal connections can be tedious and time consuming, it is doable. With fascinating developments in logistics, AI and remote sensing in the last few years, the possibilities are enormous. At the macro level, its precursors are Input-Output table and backward-forward linkages that are textbook materials in all UG courses in economics across the world. Further, tools such as Social Accounting Matrix and IMPLAN (used extensively in USA for ecological restoration endeavours) have been helping many to undertake such exercises. In short, one-to-one or many-to-one or one-to-many relationships between economic-economic and economic-ecological and even ecological-economic can be and have been arrived at through these tools. Most of these concern the “source” side of the economic system-ecosystem linkages.

03.ON THE OTHER HAND, such relationships are impossible to derive for the “sink” side, in particular when the impacts are diffused and affect global commons like ozone layer (its property regime is open access, but resource regime is of a common property, being rival and non-exclusive; see, Aril Vatn’s works for more details). Emissions from non-point sources make the problem more complicated. On top of it, the resulting changes in the variables of concern (such as temperature and rainfall) are slow, and are subjected to many ‘confounders’. The next ‘straw’ appears from the ‘tiny’ contributions by each of the supposed ‘causes’ towards the impacts, or the ‘harm’. Consider what Federal Court of Australia recently stated in a case involving eight children seeking a ‘duty of care to protect’ them ‘from harm caused by climate change’ by the Minister for the Environment [Minister for the Environment v Sharma [2022] FCAFC 35]:

“The fourth scenario is where there are multiple contributing causes by persons not acting in concert, none of which alone would be sufficient to cause injury, but which in combination cause the injury alleged […] The issue to which the fourth scenario gives rise is that no single contributing cause would satisfy the “but for” test, which at common law is an important negative criterion of causation […] The “tiny” contribution to which the primary judge referred would at most amount to a contribution to an increased risk of harm, but not a risk of contribution to the harm itself, still less a material contribution that would attract the principles in Bonnington Castings” [paras 879, 882 in link]

In general,

“Under the principles of international law . . . no state has the right to use or permit the use of territory in such a manner as to cause injury by fumes in or to the territory of another of the properties or persons therein, when the case is of serious consequence and the injury is established by clear and convincing evidence” (United States v. Canada, 3 RIAA 1907 (1941), as cited in Philippe Sands, 2003, Principles of International Environmental Law, Second Edition, Cambridge, Cambridge University Press, 242, emphasis added).

Also,

“For state and civil liability, international rules address certain substantive and procedural elements that determine the nature and extent of the liability. The common issues that emerge are:

· whether to designate environmental damage as a distinct head of damage (separate from personal injury and property damage);

· defining environmental damage;

· establishing the standard of care (absolute, strict or fault);

· identifying the person or persons against whom the claim should be brought;

· determining who may bring a claim;

· designating the forum or fora before which claims may be brought;

· determining the remedies which are available; and

· providing for the availability of certain defences.”

(Philippe Sands, Jacqueline Peel, Adriana Fabra and Ruth MacKenzie, 2018, Principles of International Environmental Law, Fourth Edition, Cambridge, Cambridge University Press, 737)

The final ‘straw’ originates from the fact that even if causes can be identified, extent of harm can be accounted for and the ‘compensation’ to remedy the harm is arrived at in monetary terms or otherwise, as no ‘property regime’ is associated with this ‘resource’ (i.e. the ozone layer ) there is no clear legal mechanism for payment of such compensation. Nation-states have been historically reluctant to make claims for compensations of this kind. Rather, the demands have been to finance ‘carbon-cutting’ or ‘transition’ to green energy sources by the global North (link) or Bretton Woods Institutions like IMF and World Bank (link). As on date, there has not been much success in this regard, notwithstanding several commitments made by several countries.

04. RISKS FROM THE perturbations in the ‘relevant’ ecosystems in sustaining economic systems have been well established. Literature on ‘mitigation’ and ‘adaptation’ to such risks has been quite common since IPCC reports started to focus on these areas. It may be useful to understand the process flow here. Let’s take the context of ‘natural disasters’ in India as an illustration:

A few matters are obvious: availability of relevant and credible information to those who are to act, trust on the part of these actors on such information, information processing ability on the part of these actors to translate this information to gauge the seriousness of risk, means and ability to act towards reducing exposure to risk. This ‘process flow’ is the identical to the concerned economic agents, irrespective of whether she is a paddy farmer near the coasts of the Sunderbans in Bangladesh or India (I owe this point to Amitav Ghosh in The Nutmeg’s Curse), or the hedge fund manager at an international finance institution. Of course, the scope of information required is connected to the scale of the concerned economic system (Si) and the relevant ecological systems. It may be noteworthy to note the ‘ultimate’ mitigation response in either case: the farmer may sell off her land and become a ‘climate refugee’ and the hedge fund manager may sell the assets with a greater risk and buy the ones with a lower one. In the former, the relevant information reaches the farmer on its own; in the latter, the information has to be generated first before reaching the hedge fund manager. There are costs associated with the latter; environmental and social governance (ESG) is to take care of it. But before proceeding further, a short detour is necessary. On the understanding of time by decision makers in virtual, real and real-real economic systems: this classification of ecological economists is quite useful.

— — — to be continued.

[1] This is in the nature of a ‘feedback loop’ and is usually captured through GHG emissions.