Sunday, October 09, 2022

One of the Hottest Trends in the World of Investing Is a Sham (ESG, environmental, social and governance criteria)

By Hans Taparia. He is a professor at the New York University Stern School of Business. Excerpts:

"But the reality is less inspiring. Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world."

"Perhaps the biggest problem is the ratings industry. To construct E.S.G. funds, investment managers rely on rating agencies — such as Sustainalytics, S&P and MSCI — that create indexes grouping sets of companies that are meant to be good corporate citizens. (Some examples are the Dow Jones Sustainability World Index and the MSCI ESG Universal Indexes.) These agencies also rate companies on E.S.G. criteria and sell the ratings to investment firms.

But contrary to the spirit of E.S.G. investing (and likely unknown to most investors), the leading rating agencies are not scoring companies on their degree of environmental or social responsibility. Instead, they are measuring how much potential harm E.S.G. factors like carbon emissions have on companies’ financial performance.

Corporate responsibility and financial risk, however, are not the same thing. Indeed, they can be diametrically opposed.

McDonald’s, for instance, was given an upgrade of its E.S.G. rating last year by MSCI, which cited reduced risks to the company’s bottom line as a result of changes that the company made concerning packaging material and waste. But greenhouse gas emissions from the operations and supply chain of McDonald’s, which is one of the world’s largest buyers of beef, grew by 16 percent from 2015 to 2020. Those emissions are a direct cause of climate change, but because MSCI didn’t see them as posing a financial risk for McDonald’s, they didn’t negatively affect the rating."

"Given this lenient rating system, it’s not difficult for a company to be deemed environmentally or socially responsible. Indeed, 90 percent of stocks in the S&P 500 can be found in an E.S.G. fund built with MSCI ratings.

Most technology stocks, including Alphabet and Meta, are part of E.S.G. funds, despite concerns about their role in facilitating the spread of misinformation and hate speech. Coca-Cola and Pepsi have gotten very high E.S.G. scores and find themselves in most big E.S.G. funds, despite manufacturing products that are a major cause of diabetes, obesity and early mortality and despite being the world’s largest contributors to plastic pollution. Perhaps most egregiously, BP and Exxon get respectable ratings from MSCI."

"The best approach would be for rating agencies to measure the costs to society and the environment that are not directly borne by companies — what economists call negative externalities."

Related posts

An Inconvenient Truth About ESG Investing (2022)

ESG Investing Can Do Good or Do Well, but Don’t Expect Both  (2022)

The hidden costs of corporate social responsibility (2021)

Why the Sustainable Investment Craze Is Flawed (2020)

C.E.O.s Are Qualified to Make Profits, Not Lead Society (2020)

ESG Investing in the Pandemic Shows Power of Luck (2020)

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’ (2020)

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards (2020)

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges) (2019)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy) (2017)

Can You Find Virtue by Investing in Vice? (2006)

What if companies pledge to adhere to social and environmental accountability guidelines?
(2015)

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 
(2007)

Data show that socially responsible investments can outperform the S&P 500 index
(2017)
 

Is altruism a result of selfishness? (2017)

Do you have to be selfish to make more money? (2018)

Does collective self-deception mask selfish behavior? (2018)

Why Doing Good Makes It Easier to Be Bad (2019)

Businesses intentionally display their social and environmental performance in addition to theirfinancial performance to stakeholders (2019)

Should you invest according to religious guidelines? (2017)

Companies Adapt to Activism by Athletes (2021)

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find?
by Joseph C. Sternberg of the WSJ (2017)

No comments: