Does ethical investment withhold capital from those that most need it?

What does ESG stand for? To most people it refers to the environmental, social and governance standards that guide a growing number of ethical investors. But Charlie Robertson of Renaissance Capital, an investment bank, reckons ESG risks becoming code for something else: an excuse for investors to put all of their money in Scandinavia.

Prosperous havens rate highly on the criteria ESG investors employ. By contrast, the emerging economies that interest Robertson do poorly. They are often dirty and corrupt — at least compared with Sweden. Their most liquid companies tend to be national champions or sprawling conglomerates that neglect minority shareholders and jump into bed with the government. Often emerging-market sovereigns default on their duty to protect human rights.

Ethically driven investment can avoid such distastefulness. But blind adherence to ESG criteria, Robertson argues, could skew capital flows toward the most privileged parts of the world. That would make it harder for poorer economies to escape poverty — a failure that could, in turn, inhibit their progress on green, governance and social justice matters.

Are Robertson's fears justified? Emerging markets do command less weight in stock- and bond-market indexes that incorporate ethical criteria. MSCI's ESG Universal index, for example, gives emerging market shares only a 9 percent weight. That compares with 11 percent in the firm's more conventional global-equity index.

The gap may not sound big. But it means 18 percent less money from any investor following the ethical rather than the amoral index.

Robertson argues that ethical investors should instead adopt a kind of economic relativism, judging countries relative to their GDP per person. Or investors could reward the most improved nations instead of highly rated ones.

Robertson may be pushing at an open door. Many ESG investors manage funds that are dedicated either to mature markets or emerging ones, rather than both. They are already implicitly judging countries and companies relative to their peers.

Foreign capital can also be overrated as a source of growth. Emerging economies benefit from it only after they pass a certain threshold of institutional quality, suggests research by the World Bank and Cornell University.

If investors' scruples deprive these economies of fickle foreign money, it may be a blessing in disguise. The only thing worse than a dirty, corrupt, ill-run economy is one that is also deeply in hock to foreigners.