As items ascend the corporate ladder, they can often be diluted, compromised or, in extraordinary instances like ESG, entirely manipulated. The all-encompassing acronym for a company’s environmental, social, and governance (ESG) considerations has been exploited to such an extent that the most pollutant and chauvinistic companies globally can currently boast relatively commendable ratings.
It seems incomprehensible how Tesla, the electric vehicle producer, could have a reduced ESG score (according to the latest Sustainalytics and S&P listings) compared to US oil giant Exxon. Exxon, a company which has devoted years to concealing data regarding climate change, faces legal action in the US for deceiving the general public about climate change, and openly aims to amplify oil and gas production. Furthermore, Tesla has a lower ESG score than the tobacco company Philip Morris, considering that tobacco is the cause of millions of deaths annually. In the S&P ratings, Tesla scored a disappointing 37 out of 100, whereas Philip Morris attained a socially responsible score of 84.
Those who are in favour of these ESG rankings insist that while Tesla performs favourably in terms of environmental impact, its social and governance metrics are lacking, resulting in the overall poor score.
There’s no denying that Tesla’s CEO, Elon Musk, isn’t without his controversies. There are undoubtedly genuine social and governance issues regarding his company. However, it’s questionable whether Tesla, a corporation that has arguably done more to reduce carbon emissions than any other large corporation, is truly less socially accountable than Exxon. Exxon is a company whose own scientists discovered compelling evidence in the 1970s linking carbon emissions from burning fossil fuels to global warming but chose to withhold this information and became infamous for politicising US climate policy.
ESG appears to have tumbled down a rabbit hole, a la Alice in Wonderland, where everything is backwards. Nowadays, making a net-zero pledge is as meaningful as informing your investors of your intent to generate profit.
These rankings are merely a charade, as they are evidently being exploited, points out Norman Crowley, Chairman and Originator of Wicklow-based Cool Planet, a company specializing in decarbonisation. The primary issue, he suggests, originates in the initial merging of varied concepts. He comments, “We have one concept, the environment, which is the world’s lifeline, mixed with a social element which is a human entitlement.”
Equitable treatment of diverse genders and races is an essential requirement in the business realm in 2024, it’s as indispensable as good governance, states Crowley. He makes a point to emphasise this, referencing the high ESG ratings of corporate giants like Coca Cola and Facebook Meta. He questions, though, if everything these companies do can be genuinely classified as ethical.
Crowley takes an even deeper look at the ESG initiative, noting its inception was centred on noble objectives: to scrutinise corporations and their contributions to the world, fair treatment of employees, and robust governance. Crowley, however, argues that the principle has been thoroughly tainted over time.
He observes that a prime issue stems from the surge of ESG funds and the corresponding impact of asset managers funnelling incomparable sums into stocks and funds awarded ESG ratings. Consequently, there’s a growing tendency to lessen the strictness of ESG criteria to maintain capital flow instead of propelling companies to improve.
Activists in favour of shareholders have consistently debated that incentivising executives financially could be an effective method to encourage responsible behaviour. As per data from Semler Brossy Consulting Group, ESG factors play a part in determining the pay of execs in 72% of S&P 500 firms in the US.
However, there are concerns over these measures being manipulated, as it’s far simpler to misrepresent ESG credentials than to reach solid earnings or stock price goals. Hence, businesses and executives might be adopting these new pay-determining criteria for less-than-noble motives.
A recent report by the Financial Times cited a high-ranking asset manager labelling corporate ESG objectives as “fluffy”. The report shed light on Southwest Airlines which, following a severely problematic 2022 holiday season that included 16,000 flight cancellations, nevertheless permitted senior executives to grant themselves hefty bonuses tied to ESG goals.
Striking a balance between enforcer and enabler is Legal & General Investment Management (LGIM), one of the globe’s leading fund managers. Despite continuing to hold shares in companies not included in its eco-conscious and socially driven funds, LGIM asserts it is striving to provoke change from within by keeping corporate boards in check.
Last week, a report from the activist group Oil Change International scrutinised the climate strategies of the eight most prominent oil and gas producers based in the United States and Europe. These companies, namely BP, Chevron, ConocoPhillips, Eni, Equinor, ExxonMobil, Shell, and TotalEnergies, were discovered to lack achievable plans that could keep global warming below 1.5 degrees above pre-industrial standards.
Surprisingly, except for Shell and BP, the remaining six companies are even aiming to boost their production of oil and gas. The ongoing climate crisis appears to be intensifying despite the noteworthy surge in climate-related announcements bolstered by increasingly vague ESG measures. This suggests that the time could be ripe to discontinue this concept altogether.