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OPINION: How a Laos dam collapse exposes flaws in ESG investments

by Dustin Roasa | Inclusive Development International
Thursday, 16 December 2021 16:25 GMT

A man walks on a street during the flood after the Xepian-Xe Nam Noy hydropower dam collapsed in Attapeu province, Laos July 26, 2018. Picture taken July 26, 2018. REUTERS/Soe Zeya Tun

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* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Examples like this don’t just undermine the credibility of ESG. They also make it much more difficult for victims of corporate abuse to secure accountability

By Dustin Roasa, Research Director at Inclusive Development International

Last month, one of the world’s leading dam experts issued a chilling warning: Xe Pian Xe Namnoy, a troubled hydropower dam in southern Laos, is in danger of collapse.

A collapse would be a tragic repeat of recent history. The dam failed once before, in 2018, unleashing a wall of water on local villages, killing at least 71 and displacing thousands. Many survivors are still stranded in squalid camps, their homes and farms destroyed.

Journalists in South Korea have alleged that the developers quietly made design changes to the project to save money. This included lowering the height of the auxiliary dam that failed.

The disaster has been a human rights nightmare for families in rural Laos. It is also a stark warning for the $40 trillion ESG investment industry, which claims to direct capital to companies that are environmentally and socially responsible.

When the dam burst, dozens of ESG-labeled funds held shares in the project’s developers. Three years later, despite a large body of evidence pointing to reckless and callous behavior on the part of the developers, that ESG investment is still there. In some cases, the developers have seen their ESG ratings improve, and sustainability-labeled money has not just failed to exit but has poured in.

The case lays bare a fundamental problem with ESG, in particular the ‘S’, where social performance is measured. Key gatekeepers like MSCI, FTSE and S&P Dow Jones – which rate companies and construct indices, or lists, of good ESG performers that are used by asset managers to create funds – are whitewashing egregious corporate behavior, not just in Laos but around the world.

The problem is systemic and widespread. My organization has followed the money behind more than 150 large projects in Asia and Africa that are implicated in serious human rights violations. We have consistently found that the companies behind these projects get high ESG marks, landing them on key indices and funds.

This does more than direct “sustainable” capital to rights-abusing companies. It calls into question the very legitimacy of ESG among retail investors, who have been told that they can align their money with their values.

The case of SK Group, the Korean firm that built the dam in Laos, is instructive. Before the disaster, SK Inc., the corporate parent formerly known as SK Holdings, had a modest ESG score of BBB from MSCI. The day after the dam collapsed, SK Inc.’s share price dropped 6%, and its construction subsidiary’s dropped 30%, making it clear that investors considered the collapse material.

What did MSCI do? Three months later, it increased SK Inc.’s score to A. Today, the company’s score is AA, the second-highest rating. Apparently, not even United Nations human rights experts calling out SK for causing a humanitarian disaster and failing to remedy it could convince MSCI to downgrade and remove the company from its indices.

At least 37 ESG-labeled funds now hold shares in the company. Adding further insult to injury, the Chinese government recently recruited SK to help it create ESG standards.

SK is not an anomaly. Another key developer of the dam, the Thai firm RATCH Group PCL, also the project’s construction supervisor, benefits from finance billed as “sustainable.” Earlier this year, the International Finance Corporation, considered a global leader in ESG investing, loaned RATCH $150 million to – of all things – develop hydropower projects in Southeast Asia.

Examples like this don’t just undermine the credibility of ESG. They also make it much more difficult for victims of corporate abuse to secure accountability.

On behalf of the survivors in Laos, a coalition of organizations including mine has called on the developers to repair the lives of the families who lost everything. But our calls have been met with inaction.

This is morally indefensible. It flies in the face of international human rights standards.

Sadly, it’s also not surprising. Because if these companies can wipe their hands of responsibility for the collapse, and they can ignore the threat of another one, all while watching ESG money pour in, what incentive do they have to act?

Industry insiders seem to know ESG has a problem. But while they debate concepts like “materiality” and “alpha” in white papers and on panels, the industry is failing basic moral tests like this one.

It is rewarding rights-abusing miners in DRC, companies funding and equipping the military in Myanmar, and consumer brands whose palm oil supply chains decimate forests. This is a systemic problem with global implications. It’s a story we will continue to tell.

ESG has become a $40 trillion whitewashing scheme that is failing both the investing public and vulnerable communities around the world. Even worse, the industry’s dramatic rise has obscured an essential point – all investing, whether it carries the ESG label or not, must respect human rights.