This article first appeared in Forum, The Edge Malaysia Weekly on April 4, 2022 - April 10, 2022

We may be distracted by the Ukraine war but for most of us, building forward better is the more urgent task in the post-pandemic period. The Americans call it “build back better”, but building back the past is bad if all it does is to preserve the status quo. Business as usual is no longer viable when the world is more unequal and burning up faster.

Last November, world leaders gathered in Glasgow for COP26, the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change. Climate activist Greta Thunberg called the whole event more “blah, blah”, meaning more talk than action. The ambition of all these world leaders and climate activists was to get more countries to commit to reducing carbon emissions, which are heating up the earth by more than 1.5°C, beyond which hundreds of millions of people will die from heat waves, droughts, food and water shortages, and loss of animals and plants.

Two of the largest countries, China and India, promised to get to carbon neutrality by 2060 and 2070 respectively, whereas most of the rich countries agreed to do so by 2050. Essentially, the rich countries, which account for the bulk of past carbon emissions, want the poorer countries, who have larger populations and account for more future carbon emissions because they are growing faster, to bear the greater burden of cutting carbon emissions. This is the rich telling the poor that they need to do more to make the world better.

“Sustainable finance” is the battle cry for the finance sector to do more to help in climate action. After all, the financial sector has assets of US$468 trillion — 5½ times more than world GDP in 2020 (Financial Stability Board estimates). The financial tail is wagging the (real) dog. Five years after the COP21 (2015) commitment to create a US$100 billion Climate Fund, the rich countries have not pitched in the full amount. Instead, Climate Action 100+, a network of 615 investors (investment funds and managers), almost all in rich countries holding US$65 trillion in funds, are committing to enforce climate action — they will not lend or invest in companies that do not meet ESG (environmental, social and governance) standards.

Sounds wonderful? Let’s examine sustainable finance in substance rather than form.

First, finance is responsible for climate and planetary destruction because carbon emissions (through burning fossil fuels) are due to excess consumption, financed by excess debt. You can’t consume more than what you earn, but you can consume if someone is willing to lend you on the never-never. Global financial assets were around 100% of GDP in 1980, but are now 5.5 times GDP and rising because debt and monetary creation helps rich countries borrow someone else’s money to spend. Higher interest rates would have balanced the books between demand and supply, but the rich and powerful pushed the central banks to expand their balance sheets (quantitative easing) so interest rates are negative in real terms (lower than inflation). This means that poor people’s savings are eroded faster than those of the rich. According to Oxfam and the International Labour Organization, during the pandemic in 2020, billionaire wealth gained US$3.9 trillion, while world labour income lost nearly US$4 trillion. By the way, the top four central banks printed US$7 trillion that year, so you know who gained or lost from the pandemic. Furthermore, the Credit Suisse Global Wealth Databook showed that the richest 1% owned 46% of the world’s wealth in 2020.

Lest you think I am a socialist (which I am not), my background is in central banking and I have been a financial regulator who has witnessed the greatest wealth transfer the world has ever seen, all this in the name of free markets, human rights and transparency. Money is defying gravity, flowing uphill to rich countries from poor countries.

Second, sustainable finance sounds great in aspiration but it also depends on execution. The European Union defines sustainable finance as the “process of taking ESG considerations into account when making investment decisions in the financial sector”. The EU sees sustainable finance as key to the delivery of the European Green Deal, meaning “no net emissions of greenhouse gases by 2050; economic growth decoupled from resource use; and no person and no place left behind”. This coming from a region that has just committed to spending up to 2% of GDP on defence. Imagine “green” fighter jets and tanks to be produced in the name of ESG.

Third, who decides which companies meet ESG standards? It is worth noting that the International Financial Reporting Standards (IFRS) Foundation has not yet set the definitive ESG reporting standard, but will build on the work of the finance-led Task Force on Climate-Related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board (SASB) reporting standards with specific guidance for 77 sectors. In other words, the rich and powerful corporations and accounting firms in advanced markets will set the standards, and the emerging markets had better comply.

The real issue is not just reporting (transparency) but performance standards and auditing (accountability). For years, powerful tobacco and oil and gas multinationals were “green-washing”, paying lobbyists to enable their companies to report “good, green and safe” when they were major polluters or hurting public health. For example, an oil and gas company can report that it meets ESG standards by buying carbon credits, meaning it buys a carbon offset credit equivalent to the amount of emissions it produces. In effect, the company buys carbon credits from a company or project that reduces carbon by capturing or storing CO — for example, a reforestation project.

All this sounds good, but what is happening on the ground?

Australia is a major carbon emission country and carbon offset schemes are in vogue. Here’s what Australian National University’s Prof Andrew MacIntosh, former chair of the Australian Emission Reduction Assurance Committee, said of Australia’s carbon emission credits scheme:

“What is occurring is a fraud on the environment, a fraud on taxpayers and a fraud on unwitting consumers. People are getting credits for not clearing forests that were never going to be cleared, they are getting credits for growing trees that are already there, they are getting credits for growing forests in places that will never sustain permanent forests and they are getting credits for operating electricity generators at large landfills that would have operated anyway.”

If Australia is facing such fraud, what chance for emerging markets like Malaysia, which are already victims of carbon capture scams?

What are we to do? We should look at ESG not just as a threat but as an opportunity. Our top listed companies have been hurt because of allegations of human rights abuses on use of migrant labour. Our palm oil companies’ shares have not risen that much compared with record palm oil prices because the rich country fund managers think that palm oil kills orangutans, produces cancerous products and leads to biodiversity loss. This is due not just to ESG reporting failure, but also ESG performance incompetence. Our top companies fail at getting our messages across, but more importantly, they should do more to walk the talk, rather than just blaming the foreigners.

First, collectively, financial regulators such as Bank Negara Malaysia, Securities Commission Malaysia, the Malaysian Institute of Certified Public Accountants, Bursa Malaysia, bankers and fund managers, Federation of Malaysian Manufacturers and investor representatives should convene a forum to decide on how ESG standards can be formulated that are realistic to Malaysian conditions. We must have concrete examples on how difficult it is to comply with “global” standards that do not fit local conditions. Each industry has special situations in which it can identify what the threats and costs are, and how it can meet these conditions or “offset” them. Our national experts can provide feedback to global regulators and standards boards on what is practical, rather than what is “theoretical”.

Second, one reason why Malaysia is not able to get its act together on a carbon tax, price or carbon market is because we face a collective action trap (CAT). Changing complex systems requires the cooperation of many different departments, agencies and vested interests. Everyone points to someone else as responsible for action, when actually no one takes any action or responsibility. At a time when politics is somewhat dysfunctional, it is time for the financial community to take the lead to convene specific work groups to work on the ESG performance standards, creation of carbon markets, and formulation of appropriate rules and regulations that would foster the right sustainable finance actions.

Third, high level aspirations and ideals do not easily translate into multiple ESG projects and programmes that deliver green, inclusive reality. This is very tough indeed. Every multilateral report on the Sustainable Development Goals (SDG) proclaims lofty principles and aspirations, but has very little to offer in terms of concrete ESG action on how to turn aspirations into good outcomes. Global ideals ultimately depend on local action on the ground. There are millions of civil activists (non-governmental, non-profit organisations) and companies who need the know-how, funding and trust to do the right thing. Often, the funding may not be much. Getting the right know-how at the right time is key. Delivery is always about the last mile (or inch) problem.

Fourth, what is missing is the networking of the supply of ESG expertise (and funding) to help our community to act and deliver green, inclusive development. Markets network or match supply and demand, but markets fail because we do not even have a proper carbon price. To expect small companies to deal with their loss of income and health from the pandemic, go digital, repair supply chains, cope with inflation and then meet ESG standards that are unclear and involve costs rather than generate income is unrealistic.

Think about the ESG market like the stock market, which matches investors with companies needing capital. A stock market is essentially an electronic “bulletin board” that reports deals matched between buyers and sellers, which are settled through a clearing, payment and registry system that records the transfer of property rights (ownership of stock) between buyer, seller, broker, bank and so on.

What we lack therefore is an understanding that the ESG market is like any other market mechanism, an ecosystem of participants that co-creates for the benefit of all (except for those who corrupt and capture the system for their own benefit).

Ecosystems are not created easily, but once they work, they produce more than the sum of their parts. Building ecosystems is not rocket science. In Malaysia, we have the talent and resources to get things done; only we lack the will to do so. We have too many CATs, not enough RATs (real active transformers) and too many BATS (bleeding awful talkers, not walkers).

Former Chinese leader Deng Xiaoping used to say that it does not matter whether the cat is black or white, as long as it catches rats. Today, we need green cats without brown hearts to deliver us from a burning planet.

Tan Sri Andrew Sheng writes on global issues that affect investors

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.