It all coincided with a tough reelection campaign for Turkey’s president, Recep Erdoğan, whose rule has become increasingly autocratic since he took office in 2014: After a coup attempt in 2016, Erdoğan purged his critics from the judiciary, military, police forces, civil service, universities, and news media. The U.S.-based Freedom House—whose annual report is broadly considered a gold standard on political liberty in the world—has meanwhile downgraded Turkey’s ranking from Partly Free to Not Free; and the Committee to Protect Journalists now considers it the planet’s fourth-worst jailer of reporters, behind Iran, China, and Myanmar. So why are socially responsible Western investors now bankrolling Turkey’s government with an ESG bond?

Marcos Buscaglia is an economist, the former head of the Latin America economics team at Bank of America Merrill Lynch, and the author of the forthcoming Beyond the ESG Portfolio. How Wall Street Can Help Democracies Survive. To Buscaglia, the answer is, for every ethical issue they may be considering, they’re not thinking about democracy.

J.J. Gould: Let’s start by touching on the technical question here: What are ESG investments, exactly, and how do they work?

Marcos Buscaglia: The idea of socially responsible investment—the idea that ethical considerations, beyond financial returns to shareholders, should also govern investment decisions—has been a theme forever. In the West alone, there’ve been major campaigns in recent decades to promote divestment from Apartheid South Africa, for example, or tobacco companies.

ESG indexes are different in the sense that they represent a whole new layer of investment analysis. They say, yes, investors will want to consider all the customary factors—financials, products’ market fit, projected cash flows, and so on—but they can now also look systematically at other factors that help them align their investments with their values.

The framework for these indexes is called “ESG” for Environmental, Social, and Governance. Essentially, the framework evaluates the sustainability and broader ethical impact of an investment. Environmental factors include things like carbon emissions, resource usage, and waste management; social factors, things like a company’s relationships with its employees, customers, or communities—including labor practices, diversity and inclusion, and so on; governance focuses on things like leadership, transparency, and accountability in decision-making processes.

Gould: Thinking about Turkey’s big green bond, then, what’s the problem there—assuming it’s marked for legitimate green initiatives? Investment going to them is good, no?

The second is with what we don’t know: Just over a month before an election everyone thought Erdoğan would lose, his government issued the equivalent of $2.5 billion. Then, he won and forced a runoff election, happening this weekend. We know Erdoğan’s campaign was spending like crazy, but we don’t really know what money was flowing into it.

Like many countries where democracy is weak, Turkey formally holds elections, but it doesn’t have liberal rights, or the rule of law, or transparency in any sense that would allow us to see where all the money from its green bond is going. And of course, money is fungible—so even if it was properly directed to green projects in this case, it will also have liberated funds from the budget of a government that’s under the control of a ruthless autocratic leadership. Either way, this big green bond ends up being a big greenwash.

Gould: Because Turkey is autocratic, we know its green bond is supporting autocratic rule; and also because it’s autocratic, there’s lots we don’t know about how the bond is supporting autocratic rule?

Buscaglia: Exactly.

Gould: How have considerations related to democracy figured into ESG ratings, then?

Buscaglia: Virtually not at all. If we look at books about ESG, the word democracy almost never appears in them. If we look at research papers related to ESG, the word is likewise very difficult to find. Sibling language like human rights will appear every now and then. But democracy is almost completely absent. Basically, ESG does not take democracy into account.

We’re talking about Turkey’s green bond as an example of what can happen with the exclusion of democratic considerations from ESG ratings. Here’s another—to me, very striking—example: J.P. Morgan has indexes of government bonds that are very popular, very widely tracked. They’re very good. And they include ESG-corrected indexes. The day Russia invaded Ukraine, Russia had a bigger share in J.P. Morgan’s ESG-corrected index than it did in the non-ESG-corrected one. So as an investor in government bonds looking at J.P. Morgan’s indexes, you’d have ended up with more Russian bonds if you’d taken ESG considerations into account than if you hadn’t.

“It can be hard to know the answer to a question no one’s asking. But to date, there’s been no real investor backlash on the issue of democracy. And there’s also been—I think it’s important to note—an assumption among investors that autocracies are generally less messy than democracies, that they’re more orderly, and that they ultimately deliver better returns. So if those returns come at some cost in terms of democratic standards or the preservation of human rights, investors have been inclined to look away.”

“Luis Martinez of the University of Chicago looked around the world at the relationship between nighttime luminosity—the lights from cities that satellites imaging can pick up—and gross domestic product, GDP, the standard indicator of economic growth. Martinez looked at data from 184 countries over 20 years, and then he compared it to data on democracy from Freedom House. And what he found was that autocratic regimes were on the whole overstating their GDP growth.”

“If you look at the global pattern of populist autocrats taking power—typically after bad economic times—they tend to consolidate their power with economic policies that make them popular. Well, for that, they need money. And it’s predominantly international investors—above all, American and European and Japanese investors—who’re providing it. If these autocrats didn’t have access to those funds, would they have been able to survive for so long?”