The investment usually uses a combination of head, heart and intestines although it is not supposed to. And perhaps no market theme evokes “all feelings” like ESG.
This week, a major move to exclude Tesla from a closely followed Environmental, Social and Governance (ESG) index has brought anger and relief in almost equal measure.
Defense was shown from Standard & Poor’s, which rejected Tesla from its ESG index; Tesla annoyed TSLA,
Investors including well-known asset manager and Tesla bull Cathy Wood. There was also an exciting snapback from Elon Musk.
Sustainable investment: Today’s widely accepted ESG ratings and net-zero promises are mostly worthless, say two pioneers of sustainable investment
For the most part, a new wave of confusion has arisen over what constitutes “ESG” if many no longer deserve it as an anti-petrol rebel.
The S&P 500 ESG index dropped Musk’s Tesla from the lineup as part of its annual rebalancing. But, in large part because it is supposed to track the wide S&P 500 SPX,
While adding an ESG layer, the indicator holds the oil giant ExxonMobil XOM,
Its in the top ESG mixture. Also included: JPMorgan Chase & Co. JPM,
Which has been dinged by environmental groups as the main lender of oil patches.
“The ESG is a scam. It’s armed with fake social justice fighters, “Musk tweeted, regretting that ExxonMobil Tesla was at the top.
“Ridiculous,” was Wood’s harsh response to Tesla’s removal.
“While Tesla could play a role in keeping fuel-powered vehicles off the road, it lags behind its peers when tested through a wide ESG lens,” argued Margaret Dorn, senior director and head of the North American ESG Index at S&P. Dow Jones index, in a blog post.
Read: EVs can save energy for our homes and grids: why ‘go-to-everything’ technology investment theme must be followed
In particular, it was “S” and “G” that annoyed Tesla “E”, the S&P report shows. Tesla was identified for its racial discrimination and poor working conditions in Fremont, California. The carmaker was called in to conduct an NHTSA investigation after multiple autopsies were attached to his autopilot vehicle following multiple deaths and injuries.
ESG-minded investment house Just Capital has the same criticism as S&P. Tesla has historically scored just under 10% of Just Capital’s annual sustainability ranking, primarily on how it pays and treats its employees, the investment firm said. Broadly speaking, Tesla performs well on environmental issues, consumer treatment, and job creation in the U.S., but not well on specific “S” and “G” criteria, including “providing fair and living wages” or “protecting workers’ health and safety.” Or with the Diversity, Equality and Inclusion (DEI) – related inequality debate.
Paul Watchman, an industry consultant who wrote a landmark report in the mid-2000s that helped ESG start investing, said Tesla should be part of the ESG index. “Not all violations of the ESG are equal, and this assessment shows how distorted the S&P assessment is,” he told Bloomberg.
This is the only difference of opinion that can confuse investors the most.
“Most investment managers who are implementing ESG are simply paying data providers to tell them what a good ESG is,” Tony Tersich of Calamos Global Sustainable Equities Fund said in a MarketWatch interview.
ESG ratings are not like scores given by credit rating agencies, where there is agreement on creditworthiness criteria. With ESG, there is still no standard definition.
Dimensional Fund Advisors say it is also challenged by ESG ratings. The correlation between the ESG scores of different providers is estimated at 0.54, they said. By comparison, the correlation between the credit ratings set by Moody’s and S&P is 0.99.
MSCI Inc., the leading provider of ESG ratings, still includes Tesla and Exxon in its more widely tracked ESG-centric index, another level of confusion over what ESG actually means. The methods that MSCI and S&P use for their ESG indicators are very similar.
As part of the S&P, Exxon’s inclusion maintains its energy-sector representation in line with broader goals.
But it does ask many investors why make ESG a top priority. And yet others lament the ESG commitment and all the exceptions that come with placing stocks in an ESG index, ETF or mutual fund.
Hardline environmental groups also have a problem with the inclusion of traditional oil companies under an ESG label. “We see funding in our screening equipment with ESG in their name because they contain dozens of fossil fuel extraction companies and coal-fired utilities,” said Andrew Behr, CEO of As You So So.
But other energy-industry observers say their inclusion could have a different meaning. The transformation of cleaner alternatives into well-established traditional energy firms will be most effective due to their size, multinational reach and their investment in practices such as carbon capture. Considering these as ESG-lights puts pressure on evolution, they argue.
Regardless of which part of the ESG is more important to an investor, trust is the most important.
In fact, some ESG observers have suggested that Tesla is not as environmentally friendly as its hyper-focus indicates, which means that you cannot take a company’s ESG commitment solely on the basis of merit. Tesla was recently tagged by As You Soo in a report that ranked 55 companies in their “green” progress after making promises. Tesla has earned the bad mark for not sharing emissions data publicly.
“Parts are special [Tesla’s] Lack of disclosure of problems. Anyone committed to freedom of speech can do a better job of transparency at Tesla, “said Martin Whitaker, CEO of Just Capital.
Read: What does ‘free speech’ really mean? Despite what Elon Musk and many users think, Twitter is not censoring speech
Environmental, and in particular, greenhouse gas emissions, out of the data, could present challenges to the growth of a wide range of company sustainability data, said Will Collins-Dean, senior portfolio manager and Eric Geffrey, senior investment strategist at Dimensional Fund Advisors.
Corporate sustainability reports, for example, can be a hundred pages long, differ considerably from one company to another, and may not contain all the information of investor interest.
The Securities and Exchange Commission is approaching the Unified Climate-Change Risk Reporting Regulation, and is looking at broader ESG commitments. The Department of Labor is also considering the inclusion of ESG in 401 (k) s, how transparent it should be. For now, the company’s move is voluntary.
If individual companies are missing the mark with ESG. Funds that scoop up these names can be just as confusing.
A report by Influencemap, a London-based non-profit organization, evaluated 593 equity funds with total net assets of more than 256 billion and found that “421 of them have a negative portfolio with Paris alignment scores.” This means that most lists are not on track for the maximum 2-degree Celsius (and ideally, 1.5 degree) global warmup set by the voluntary Paris Climate Agreement. Companies may promise a greener future, but are delivering much less.
The key to investing in the ESG is the hope of many.
“Instead of using a generic ESG rating, investors should first identify which specific ESG considerations are most important to them, and then choose an investment strategy accordingly,” says Collins-Dean and Gefroy.
“An example might be the reduction in exposure to companies with high emissions intensity,” they said. “The wider the set of objectives, the harder it will be to manage interactions between them. A ‘kitchen sync’ approach that integrates dozens of variables can make it difficult for investors to understand the allocation of a portfolio and lead to unintended consequences.”