A Proposal: Environmental, Social, Governance as the Reparations Solution

-- By AlexanderHohl - 26 Feb 2021

Introducing ESG

The commercialized idea (because surely this was not the first time someone had the thought that corporations should not only serve shareholders, but stakeholders, too) of Environmental, Social, and Governance, or ESG, began in 2005, with a critical study (and conference), “Who Cares Wins,” which examined the role of environmental, social and governance value drivers in asset management and financial research. ESG basically describes a set of environmental, social, and governance factors used to evaluate investment and company impacts beyond traditional financial measures. ESG is premised on treating environmental and social issues as core elements of strategic positioning for any organization. Plainly stated, ESG represents the manifestation of a duty to stakeholders, as well as “shareholders,” i.e., the communities and consumers that companies serve and rely on. The “E” in ESG captures the ongoing monitoring of energy efficiencies, carbon footprints, greenhouse gas emissions, biodiversity, climate change and pollution mitigation, and waste management and water usage. The “S” in ESG covers labor standards, wages and benefits, workplace and board diversity, privacy and data protection, health and safety, supply-chain management, and other human capital and social justice issues. Finally, the “G” in ESG covers the governance of the “E” and the “S” categories – corporate board composition and structure, strategic sustainability oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption related issues.

The moment and the current opportunity -- a racial awakening -- not just another "crisis mode"

While corporate and regulatory organizing efforts around ESG began in 2005, the emphasis on ESG has grown rapidly in the last few years. 2020 brought an ESG reckoning around racial justice issues to the forefront, with major public and private organizations across verticals and political spectrums displaying support for Black Lives. This is where the real discussion begins – with Black Lives. We must take advantage of this reckoning before this “crisis mode” ends; we must use this moment to find a reparations solution.

The origins of reparations

The idea of reparations is not new. In 1865, at the end of the Civil War, General William T. Sherman made Special Field Order No. 15, issuing 400,000 acres of land stretching along the coast of South Carolina to Florida to the formerly enslaved. The order would have redistributed the roughly 400,000 acres of land, in forty-acre segments, to families of the formerly enslaved. This glimmer of hope for newly freed Blacks was short-lived, however, as after President Lincoln’s assassination in April of 1865, President Andrew Johnson overturned Sherman’s directive. After roughly 200 years of slavery, the annulling of General Sherman’s order to provide the formerly enslaved 40-acre land grants (and a mule) created the indestructible foundation of the racial wealth gap that has widened and persisted to this day. This foundation has been reinforced over centuries through state-sanctioned and institutional discrimination, leaving Black Americans and blackness generally on the economic, social, and political margins, locked away from generational wealth, prosperity, and true freedom. In 2020, Black families’ median and mean wealth is less than fifteen percent of that of white families.

Why reparations?

In my opinion, reparations are justified. Yes, because they were promised, but even if they were not, it is hard to deny that unpaid slave labor helped build the American economy, creating vast wealth that Blacks have historically been barred from sharing. Social scientists have put great thought into conceptualizing plausible reparations solutions, including how reparations might be paid, and to whom they might be paid.

Popular reparations theses

Popular theses have included evaluating labor’s share of the slave system’s profits in cotton and tobacco, estimating linear and non-linear income disparities over time, and estimating the value of wealth lost as a result of discriminatory governmental and institutional practices, such as disparities in lending and insurance. My proposal for reparations is a fusion of two such theses, one formulated by businessman Robert Smith, and the other by economist Dr. William Darity Jr. of Duke University. Smith calls his plan “the two percent solution,” which entails the top ten banks driving two percent of their net income (aggregated, roughly $978 billion) over a ten-year period into black banks and small businesses, enabling what Smith calls, “capital fusion” and healthy reinvestment. Dr. Darity’s perspective is slightly more concrete in terms of value: providing Black Americans, as a baseline, the present value of the 40 acres and a mule, which he values as nearly six trillion dollars. Dr. Darity posits that there are economically sound methods to value each phase of history during which Blacks had a thwarted ability to generate wealth, such as the post-WWII period, where a million Black veterans were not afforded the same opportunities to own a home or receive an education. What I believe is hard to quantify is the compounded economic harm of lacking credit and access to “prime” financial vehicles. Without cushions of wealth, black families pay more for credit and financial services when they have a hiccup – there is no shock absorber.

My proposal

Combining the approaches of Mr. Smith and Dr. Garity with the pressure large public corporations are feeling to focus more efforts on the “S” in ESG as it relates to racial equity, my solution involves forming a coalition of investment professionals, economists and other academics, and policy makers to create a system of regenerative investment funds with capital from an expanded group of corporations (not exclusively banks). A study would need to be conducted to create the criteria for the group of corporations. Important variables would include whether companies had historically contributed to or were complicit in the systemic expansion (or creation) of the racial wealth gap, and what percentage of a corporation’s consumer base matched those consumers eligible for reparations. Capital would be fed into several different focused investment funds, such as a real estate fund, which would involve working with government actors and community land trusts to identify property that could be used to generate revenue, all to eventually be nurtured back into Black communities through compensation of Black student debt and tuition, and investment emerging Black-owned software and tech businesses and education.

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