Investing usually uses a combination of head, heart and gut even if it is not intended. And perhaps no market theme evokes “all the emotions” just like ESG.
This week brought a major move to cut Tesla from a closely followed environmental, social and governance index (ESG) anger and relief to almost the same degree.
Defiance was shown by Standard & Poor’s, which rejected Tesla from its ESG index; irritation appeared from Tesla TSLA,
investors, including well-known asset manager and Tesla bull Cathie Wood. It was also a sizzling snapback from Elon Musk.
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For the most part, a new wave of confusion arose about what constitutes “ESG” if what many see as the anti-petrol defector no longer gets its due.
The S&P 500 ESG index dropped Musk’s Tesla from the sample as part of the annual rebalancing. But largely because it also has to track the wider S&P 500 SPX,
Although the index added an ESG layer, the oil giant ExxonMobil XOM,
in its best ESG mix. Also included: JPMorgan Chase & Co. JPM,
which has been hit by environmental groups as the main lender to the oil label.
“ESG is a scam. It has been armed by fake social justice fighters,” Musk tweeted, lamenting that ExxonMobil topped Tesla.
“Ridiculous,” was Woods concise response to Tesla’s removal.
“While Tesla may play its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a broader ESG lens,” argued Margaret Dorn, senior director and head of ESG Indexes, North America. at S&P Dow Jones Indices, in a blog post.
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Specifically, it was “S” and “G” that acidified Tesla’s “E”, shows S & P’s report. Tesla was marked for allegations of racial discrimination and poor working conditions at the factory in Fremont, California. The carmaker was also called in for its handling of the NHTSA investigation after several deaths and injuries were linked to the autopilot vehicles.
The ESG-minded investment house Just Capital has a similar critique as S&P. Tesla has historically scored in the bottom 10% of Just Capital’s annual sustainability ranking, mainly because of how it pays and treats its workers, the investment company said. Roughly speaking, Tesla performs well when it comes to environmental issues, customer care and job creation in the US, but not so well on certain “S” and “G” criteria, including “paying a fair wage and living off” or “protecting workers’ health and security “or with diversity, justice and inclusion (DEI) -related discrimination controversies.
Paul Watchman, an industry consultant who wrote a groundbreaking report in the mid-2000s that helped ESG investments pick up speed, said Tesla should be part of the ESG indices. “Not all breaches of the ESG are the same, and this assessment shows how distorted the S&P assessment is,” he told Bloomberg.
It is only this difference of opinion that can confuse investors the most.
“The majority of investment managers who use ESG simply pay money to data providers to tell them what good ESG is,” said Tony Tursich of Calamos’ Global Sustainable Equities Fund in a MarketWatch interview.
ESG ratings are not as points given by credit rating agencies, where there is agreement on criteria for creditworthiness. With ESG, there are so far no standard definitions.
Dimensional Fund Advisors say that they are also challenged by ESG assessments. The correlation between the ESG scores of different providers is estimated at 0.54, they said. In comparison, the correlation in the credit ratings assigned by Moody’s and S&P is 0.99.
MSCI Inc., the leading provider of ESG ratings, continues to include Tesla AND Exxon in its more widely tracked ESG-focused indexes, yet another layer of confusion about what ESG actually means. The methods used by MSCI and S&P for their ESG indices are very similar.
For S & P’s part, the Exxon inclusion maintains its energy sector representation in line with broad goals.
But it makes many investors ask why confuse ESG with any other priority? And still others who apologize for all the exceptions that can come with an ESG promise and an equity placement in an ESG index, ETF or equity fund.
Strong environmental groups also usually have problems with the inclusion of traditional oil companies under an ESG brand. “We see funds with ESG in their names getting Fs on our screening tools because they have dozens of fossil fuel extraction companies and coal-fired tools,” said As You Sow CEO Andrew Behar.
But other observers of the energy industry say their inclusion may have a different meaning. The transition to cleaner alternatives from the well-established traditional energy companies will be most effective given their size, multinational reach and their investment in practices such as carbon capture. To regard them as ESG-lite holds the pressure to develop, they claim.
No matter which part of the ESG means the most to an investor, trust is most important of all.
In fact, some ESG monitors say that Tesla is not as clean on the environmental side as the hyperfocus may indicate, which essentially means you can not take any company’s ESG promise alone. Tesla was recently branded by As You Sow in a report that ranked 55 companies on their “green” progress after promises have been made. Tesla received poor marks for not sharing emissions data publicly.
“Portion of [Tesla’s] the problem is the lack of disclosure. For someone who is committed to free speech, Musk can do a better job of openness in Tesla, says Martin Whittaker, founder of Just Capital.
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In addition to environmental and especially greenhouse gas emissions, data, the increase in broader information about the company’s sustainability can present challenges, says Will Collins-Dean, senior portfolio manager and Eric Geffroy, senior investment strategist at Dimensional Fund Advisors, in a comment.
For example, a company’s sustainability reports may be one hundred pages long, differ significantly from company to company, and may not contain all the information that interests investors.
The Securities and Exchange Commission is approaching uniform rules for reporting climate change, and has taken a look at broader ESG promises. The Ministry of Labor also considers the inclusion of ESG in 401 (k) s, including how transparent this supplement must be. Currently, the company’s action is voluntary.
If individual companies lack the goal of ESG. The means at which these names are collected can be just as confusing.
A report by InfluenceMap, a London-based non-profit organization, evaluated 593 mutual funds with over $ 256 billion in total net assets and found that “421 of them have a negative Portfolio Paris Alignment score”, a screener used by Influence Map. This means that the majority of the entries are not on track to reach the maximum 2-degree (and ideally 1.5 degrees) global warming set in the voluntary Paris climate agreement. The companies may promise a greener future, but far fewer deliver.
The key to solid ESG investments is many to limit expectations.
“Instead of using generic ESG assessments, investors should first identify which specific ESG considerations are most important to them, and then choose an investment strategy accordingly,” Collins-Dean and Geffroy said.
“An example might be reducing exposure to high-emission companies,” they said. “The broader set of goals, the more difficult it can be to control the interaction between them. A “kitchen sink” approach that integrates dozens of variables can make it difficult for investors to understand a portfolio’s allocations and can lead to unintended outcomes. “