ESG not enough for democracy

Recently, I interviewed Dr Marcos Buscaglia, former head of Latin America economics at Bank of America Merrill Lynch, for my Economics Explored podcast. The conversation highlighted the limitations of ESG (environmental, social, governance) standards in promoting democracy. This is the topic of Dr Buscaglia’s new book Beyond the ESG Portfolio: How Wall Street Can Help Democracies Survive. While ESG focuses on environmental and social factors, it does not prioritise democratic values. ESG metrics often do not include “democracy” and only occasionally mention human rights. 

You can check out my conversation with Dr Buscaglia on various podcast apps (e.g. Spotify) or via the embedded player below.

According to Dr Buscaglia, when Russia invaded Ukraine, the J.P. Morgan ESG EMBI Global Diversified Index had a larger share of Russian bonds than the non-ESG corrected index.1 This means that investors tracking the index supposedly more aligned with ESG goals were more exposed to Russia’s government bonds than those not. This demonstrates that ESG standards do not necessarily prevent investments in autocratic countries.

Dr Buscaglia discussed the role of indices in funnelling investments to autocrats. Many investments that finance autocrats are channelled through funds that track indices, such as Exchange Traded Funds (ETFs). The most popular indices in the stock market are the MSCI indices, while the JP Morgan indices are commonly used in government bond markets.2 Dr Buscaglia argues the ESG-corrected versions of these indices may not effectively prevent investments in autocratic regimes.

External financing has had a role in the success of autocratic regimes. For a time, the market was willing to finance Venezuela, for example, despite Hugo Chavez’s undermining of constitutional checks and balances. The market’s willingness to invest in some countries, despite the erosion of democratic institutions, shows that financial considerations often take precedence over ethical concerns.

This raises an important question about the responsibility of investors and the impact of their decisions. Dr Buscaglia mentioned the presence of democracy watchers and institutions that track the erosion of democracy in various countries. These organisations provide real-time information about the state of democracy and flag any concerns to the world. However, investors are often unaware of or choose to ignore these warnings when investing in autocratic regimes.

Ultimately, investing in autocratic regimes comes at significant risk. There is the risk of heavy financial losses if investors own financial assets from a country later subject to sanctions for violating international laws. As the Financial Times reported in the wake of the 2022 Russian invasion of Ukraine: “The imposition of sanctions on Russia has rendered its debt illiquid and virtually uninvestable, and has pushed many of its bonds towards default.”

In conclusion, my conversation with Dr Buscaglia highlights the shortcomings of ESG in promoting democracy. While ESG focuses on environmental and social factors, it does not prioritise democratic values. This is evident in the limited mention of democracy in ESG metrics and the failure of ESG-corrected indices to prevent investments in autocratic regimes effectively. Investors should consider the impact of their decisions and support countries that uphold democratic principles, as investing in democracies aligns with ethical values and potentially leads to better financial outcomes in the long run. 


  1.  J.P. Morgan notes “The J.P. Morgan ESG EMBI Global Diversified Index (JESG EMBIG) tracks liquid, US Dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi-sovereign entities.” Source: N.B. EMBI stands for Emerging Markets Bond Index.

This article was authored by Adept Economics Director Gene Tunny and published on 7 February. For further information, don’t hesitate to contact us via or 1300 169 870.

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