ESG (Environmental, Social, and Governance) is a very complicated topic, one that goes much deeper than many people realize. Beneath the surface are complexities and inconsistencies that make one wonder just how ethical ESG ratings are?
Here is a brief overview of what the E. S. G. stands for:
Environmental: these are factors that include carbon emissions, climate change vulnerability, water sourcing, biodiversity and land use, toxic emissions and waste, as well as electronic waste.
Social: these are factors that include charity work, fair trade products, investing in environmentally businesses, improved labor practice, worker safety training, and consumer financial protection.
Governance: These are factors that include employee relations, if employees have a say in company procedures, management structure, fair distribution of power, demographics of leadership teams, employee compensation, accounting practices, and business ethics.
The above lists are not comprehensive, or the only factors considered when calculating ESG scores, but it allows for an understanding of the type of things considered when companies are graded. These lists also show how broad and sometimes unrelated the different factors are. With well over a hundred companies generating ESG scores there is no consistency between the different indexing groups. MSCI could give a perfect score to Company A, but that same company could receive a vastly different score from S&P Global.
The problems lie beneath the surface. Unlike “organic” or “non-GMO” labels we see on our food, there are no set regulations or standards in place to base these scores on. There is no agreed upon definition of what ESG means, so businesses are often clobbered for things that are normal operations, for example not being “woke” enough. It’s very difficult to quantify.
Consequently, the scoring varies widely between scoring companies based on which part of the data they are focusing on. As mentioned in our previous ESG article, an ESG score doesn’t necessarily give you an accurate idea of what the companies true values really are. The primary values of any business, should include integrity, a competitive innovative spirit, and a deep sense of fairness with both employees and their customers.
The strong push for ESGs has brought on anxiety regarding “greenwashing,” where a company will make claims regarding their plans to become more “green,” but that doesn’t mean they always follow through. It’s not uncommon for a company to make a statement in a press release stating they plan to make environmentally friendly changes over the course of the next 40 years. This announcement will boost their ESG score, regardless of how effective they are with their plans.
Beyond the vagueness and greenwashing of the ratings, ESGs hold the potential to hurt smaller companies. When companies receive high ESG ratings they are qualified for and are given extra funding and grants. This allows them to grow and push out their competition. John Authers, Bloomberg Senior Markets Editor, stated, “The basic technology now exists for targeting something you don’t like and punishing it in some way by the markets…Now that we understand how to do ESG investing, it could become weaponized and could become quite a dangerous element in the unpicking of globalization.” In this way certain corporations could use ESGs to punish competition or small businesses.
The bottom line is, beware. If you are truly seeking to find ethics in business, you won’t be able to rely on an ESG score. The best thing to do is simply be ethical yourself, treat people with kindness and respect, and be a responsible steward of the resources you have access to. Decide the issues or initiatives you want to support and investigate the companies you’re looking to do business with.
Photo by Sophie Backes