My Say: Sustainability, ESG and stages of economic development

This article first appeared in Forum, The Edge Malaysia Weekly, on August 1, 2022 - August 07, 2022.
My Say: Sustainability, ESG and stages of economic development
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In 2006, the California government poured in subsidies amounting to US$3.3 billion to encourage homeowners to install photovoltaic panels in its efforts to drive the use of solar power on a large scale. These panels have a 25- to 30-year life cycle, after which they need to be disposed of.

In principle, one could recycle rather than discard those panels. But recycling a panel costs between US$20 and US$30, while discarding them in a landfill costs between US$1 and US$2. Landfills are already filling up with no concrete solutions as yet to address the looming issue of expired panels.

Unintended consequences of a transition towards sustainable practices are not limited to the richest countries. In fact, they may be even more painful in developing countries. In April 2021, Sri Lanka’s President Gotabaya Rajapaksa announced a ban on all imports of chemical fertilisers and pesticides, and required local biofertilisers to be used to make the country’s agriculture sector 100% organic.

While the move was certainly partially economic in nature — Sri Lanka wanted to save hard currency by banning imports of synthetic fertilisers and pesticides amounting to US$400 million — Rajapaksa also made arguments on the adverse health and environmental impacts of those chemical methods.

In a world where environmental, social and governance (ESG) considerations are becoming ever more prevalent, this was the equivalent of introducing a policy for electricity-generation companies to switch from coal-based plants to, say, solar completely overnight. In Sri Lanka, the move was a disaster.

A country that was once self-sufficient in rice production (imagine how many countries would kill to be in that position) saw rice production drop 20% six months after the implementation of the ban. Sri Lanka eventually had to import rice at a cost of about US$450 million, more than what it saved from banning synthetic fertiliser imports. The production of tea — Sri Lanka’s largest export — fell 18%, with the government having to spend hundreds of millions on subsidies and farmer compensation.

Look, if we are to ensure Earth remains a habitable planet for the human species, there is no question that we will absolutely need to transition towards more sustainable practices. But there are many ways to get from Point A to Point B. A straight line may not be the most direct. But as we’ve seen in California and Sri Lanka, there can be devastating consequences. And even if a straight line may make more sense in California, it does not automatically mean that that straight line is externally valid in other contexts, particularly in countries that are poorer.

In a Vox article on the Sri Lanka fertiliser issue, Saloni Shah, a food and agriculture analyst at the Breakthrough Institute in the US, says, “I think that in the Western world, we can get lost in the organic/conventional debate ... Agriculture is the backbone of economic development — for livelihoods, for food security. It should be less so about ideology and which one is better, but more so what combination of technologies, practices and market conditions will be helpful to spur development. 

In thinking about how the world moves towards a more climate-friendly set of consumption and production practices, there is a growing acknowledgement of what the International Labour Organisation (ILO) calls a “just transition”.  According to the ILO, a just transition means greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.

This makes sense — as we know, major transitions create winners and losers, especially in the short term. Oxford economist Carl Benedikt Frey, in his book The Technology Trap, shows that while the Industrial Revolution created great wealth over the long run, the immediate consequences of mechanisation were devastating to large swathes of the population, with middle-income jobs withering, wages stagnating and inequality skyrocketing. These short-term dislocations matter.

And certainly, what may be appropriate for a high-income country may be less so for a middle-income or low-income one. As (incoming) SOAS economist Ha-Joon Chang has argued, there is a wealth of evidence of rich countries “kicking away the ladder” for poorer countries. Rich countries employed (and exploited) development strategies that they now prohibit or strongly discourage developing nations from adopting. These include things like infant industry protection, trade protection and, yes, utilisation of non-renewable energy sources, just to name a few.

While it is certainly clear that the world — including developing countries — needs to transition towards a more sustainable future, we cannot ignore the differences in contexts between levels of development. Here is an easy example — from 1980 to 2020, government debt-to-GDP in Japan averaged 142% of GDP, peaking at 266% of GDP in 2020. Yet, Japan’s sovereign credit rating stands at A+ (S&P), A1 (Moody’s) and A (Fitch). Imagine what those ratings would be if a developing country, say Malaysia, had that level of debt.

Speaking of Malaysia, as I have repeated several times in this essay, we do need to transition. But as the ESG movement grows, and as calls for transition become ever louder, we need to be clear about what is most appropriate for Malaysia and not simply follow a view or an ideology that was crafted and propagated by folks in richer, more advanced nations. Those views may be right for them, but we have to ask several questions for ourselves.

Question 1: Are global standards or “best practices” appropriate for developing nations such as Malaysia? Shutting down coal power plants in rich countries may actually be a form of overdue justice, but these sorts of power plants employ thousands of people in countries whose abundant factor of production is labour. Workers need jobs. There is no future if the present gets destroyed.

Question 2: As we consider global ESG metrics and ratings, how relevant are they outside of WEIRD (Western Educated Industrialised Rich Democratic) countries? A recent paper by a trio of MIT economists compared six ESG metrics providers in terms of how correlated their ratings were — the correlations ranged from 0.38 to 0.71, with 709 metrics across 64 categories. We won’t accept this sort of chaos for any branch of our lives, so why should this situation then be reasonable for our ESG transition? There is no standardised way, even in advanced nations. How relevant might that be then for developing nations such as Malaysia?

Question 3: Who are the winners and losers? There are always losers in any transition. And the profiles of winners and losers will certainly differ depending on the context. But as Frey has shown, the devastation can be large. How do we ensure sufficient protection for those who are most vulnerable to this transition?

I don’t want to pretend like I have the answers, or that anyone does, really. But we should ask what a just transition is that is appropriate for our stage of development and for our national strategies. This means a more critical look at the ESG/sustainability agenda expounded by more advanced nations and to craft an agenda, by developing countries, that is far more relevant and reasonable for developing countries and their people.

Nicholas Khaw is an economist and head of research at Khazanah Nasional Bhd

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