The not very new imperfect truth about ESG

Posted 19 July 2022

In late May, Stuart Kirk inadvertently made himself one of the most well-known bankers in the world. The former head of responsible investing at HSBC blurted his way into global headlines with a public tirade against the “unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings” of financiers who support action against climate change.

Kirk was quickly suspended by HSBC, but the incident apparently opened a can of worms for both the bank and the ESG investment sector. Headlines were written and hands were wrung, but behind the hysteria and greenwashing headlines the ‘news’ illuminated a key facet of ESG investing that ESG investors have known for years  – it is not perfect. And, as quickly as the headlines appeared they disappeared as many realised the ‘new’ in this piece of news was not new.

ESG ratings are designed to help describe a company’s resilience to ESG risks, and in turn, allow for analysis of a business in relation to its peers. These ratings can vary wildly depending on where you look. Take Tesla, the electric car manufacturer is at the fore of the environmentally driven shift towards electrification, yet still dependant on destructive mining for precious metals, exploitative labour practices and a work culture that falls short of what many ESG investors would view as progressive. Despite this MSCI awarded Tesla an ‘A’ ESG rating, while Sustainalytics gave Tesla a ‘Medium Risk’ rating.

The rebalancing of the S&P 500 ESG index – a collection of the 500 largest companies that fit within the index provider’s criteria on what makes something ESG or not added to the story. A rebalancing of the flagship index, excluded Tesla, while oil giant ExxonMobil was given the all-clear – an apparent hallmark example of ESG’s ability to deter logic and reasoning in favour of convoluted qualifying metrics.

S&P held fast to its methodology with those in its ESG department insisting they had followed the usual rules and procedures of the index, with Tesla’s lack of a low-carbon strategy proving an issue. Tesla also fell short of the S and the E, with racial discrimination and poor working conditions at factories factored into S&P’s calculations.

This is not to say there is no value in S&P’s ESG criteria – or any rating provider for that matter. It will overlap with what ESG investors want to achieve, and the data they collect can be invaluable, but it can’t replace the hard analysis of a company or a funds.  While their interpretation of the qualitative factors underpin that the ESG ethos is ever-changing, it is also continually imperfect and so it should be.

Progress, development and improvement are part of the ESG process as they should be. That the negative stories disappeared as quickly as they appeared shows, that despite the willingness of critics to throw mud, ESG investing isn’t going anywhere and is vital to preserving the biosphere for humanity. Perhaps people in greenhouses shouldn’t throw stones.

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