World Justice Forum Highlights ESG’s Democracy Dividends

As government, NGO, and business leaders met in The Hague earlier this month for the World Justice Forum, the Center for International Private Enterprise (CIPE) led a panel on how Environmental, Social, and Governance (ESG) investing can help reinforce democratic institutions.

The June 2 event brought together two communities that don’t usually engage with one another: Global business leaders on the one hand, and pro-democracy academics, NGO leaders, and government officials on the other. Since demands for ESG standards came originally from investors seeking to differentiate ordinary investments from those with an emphasis on how corporate practices impact labor and the environment, among other factors, ESG debates do not usually involve democracy.

But there is a thematic link. While meaningful ESG standards that require third-party audits are focusing business leaders’ attention on establishing more ethical and responsible business practices, democracy-oriented organizations from CIPE to the OECD have supported responsible business practices as a bulwark to democratic governance.

“The…panel highlight[ed] how crucial business responses and initiatives on ESG are to strengthening rule of law and fostering democracy”, said Michele Crymes, ESG Coordinator at CIPE and moderator of the event.

The event aligns with increasing levels of support for democratic institutions among Western countries following Russia’s invasion of Ukraine. “Businesses are moving towards a more ethically nuanced stance,” said Robin Willing, Director of Sustainability at NIBC Bank. “There is an opportunity for us to have more discussions and working groups on ESG in business—especially with our advancement in technology.”

Virtuous Cycles

The event highlighted several ways that implementing robust verifiable ESG standards can strengthen democracy efforts, including strengthening rule of law, promoting sustainable business practices, and raising barriers to corruption. “You don’t hear rule of law included in sustainability discussions—but it needs to be there,” said John Stout, Co-Chair of the ABA Rule of Law working group.

It is well-known that countries with weak rule of law regimes tend to perform worse economically. These countries also suffer from lower levels of foreign investment. However, meaningful ESG standards provide a market-driven way to encourage companies to strengthen internal governance and accountability mechanisms. ESG-branded investments that include strong verification mechanisms and perform well financially have the potential to not only encourage more socially and environmentally responsible behavior by multi-nationals, but also increase adherence to rules by emerging market suppliers and business partners.

This spillover effect is already seen in international business operations due to enforcement of the Foreign Corrupt Practices Act, or FCPA, and other similar laws. Since multinationals can be held responsible for bribery and other corrupt acts conducted by their supply chain partners, international companies often prefer local partners that implement anti-corruption compliance measures themselves. This incentive has led to emerging market initiatives, like CIPE’s own Ethics 1st program, that help businesses raise their integrity standards and qualify for partnerships with global companies. As more and more businesses follow the rules, democratic norms are strengthened.

In a similar fashion, strong ESG standards can encourage greater adoption of corporate governance, labor, and environmental practices even if local laws don’t require them. They can also encourage national governments to strengthen their ESG regulations to attract more international investment.

Wakeup Call

As CIPE and others have acknowledged, the momentum behind global ESG standards is growing. Recent events in Ukraine have provided new urgency. “[In] the Russia-Ukraine response by leading experts…there is a push to pursue and think about strengthening our stances on ESG to promote the rule of law,” remarked Andrea Bonime-Blanc, Founder and CEO of GEC Risk advisory.

“Even though there is a critique that [ESG] has some issues, companies are creating and devoting resources and prioritizing the need to create standards” said Klaus Moosmayer, Chief Ethics, Compliance, and Risk Officer at Novartis. “ESG is here to stay.”