The Devil You Know

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    And just like that, Twitter is once again flooded by anti-ESG-sm. It was Elon Musk himself who sparked the new wave of criticism earlier this week, offering to explain to anyone still using his highly personalised platform exactly “why ESG is the devil”. His somewhat over-the-top satanic accusations are nothing new, of course. And surely no words are strong enough given how unfairly ESG rating agencies are treating his favourite baby, Tesla.

    Rather than divulging his demonic theories, Musk lets Aaron Sibarium make the anti-ESG (ratings) case for him. “From S&P Global to the London Stock Exchange, tobacco companies are crushing Tesla in the ESG ratings,” writes Sibarium, summarising an article he recently published in the Washington Free Beacon. He seems genuinely, and not entirely unreasonably, baffled by the fact that rating providers deem cigarettes a more ethical investment than electric cars.

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    Let’s ignore for a moment the apparent mix-up between ethics and ESG scores and focus on the facts at hand instead.

    ESG rating agencies, often accused of diverging vastly in their verdicts, are indeed surprisingly unanimous in bestowing lower scores to Tesla than to many of the tobacco companies. No matter how many E, S, and G variables they include in their models, where they source data or which weighing methodology is used to aggregate it; they seem to come up with similar results. And, yes, aspiring responsible investors who choose to rely entirely on ESG scores to inform their investment decisions, few as they may be[1], should find these results somewhat counterintuitive.

    Could it be the case, as Sibarium argues, that Big Tobacco has simply managed to crack the ESG ‘woke’-code and are now able to dupe the gullible analysts of Sustainalytics, S&P, etc.? “Companies like Altria [one of the largest tobacco producers in the world] have gone out of their way to emphasise the diversity of their corporate boards and the breadth of their social justice initiatives, from funding minority businesses to promoting transgender women in sports,” he writes. Meanwhile, “Tesla, whose executives are overwhelmingly white men, has resisted that bandwagon, going so far as to fire its top LGBT diversity officer last year.”

    Well, even if Altria may have found a way to manipulate the agencies, I must confess I find the second part of his argument much more intriguing. It certainly sounds like Musk and his colleagues are intentionally sabotaging their company’s chances of getting a high ESG score. Apart from making it extra difficult to sympathise with his complaints about the end result, this is an excellent illustration of the many reasons why Tesla scores so poorly on ESG, a different type of ‘key-person risk’, shall we say?

    To be fair, some of the criticism of ESG rating providers is justified. They could certainly do a better job at explaining the rationale behind their scores; there is no reason to be Guide Michelin-mysterious about it. Transparency, preferably accompanied by a pedagogical explanation of the key concepts, might go a long way in solving the sector’s credibility issues.

    Of course, disgruntled businessmen like Musk are not the only ones fuming over ESG rating providers’ inadequacy right now. Just this week, the European Commission launched a proposed regulation of the sector, noting, in a rather more restrained language, that “currently, ESG ratings do not sufficiently enable users, investors and rated entities to take informed decisions as regards ESG-related risks, impacts and opportunities. As a consequence, confidence in ratings is being undermined.” Let us hope that the efforts of the authorities “to improve the reliability, comparability and transparency of ESG ratings” will succeed.

    Until then, how about approaching the valuable analysis provided by the ESG rating agencies with the same mixture of respect and healthy scepticism we apply to any other of the multiple sources we base our investment decisions on?

    [1] After all, most institutional investors and ESG funds exclude tobacco from their portfolios anyway.

    Image courtesy of @darby via Twenty20 / NordSIP
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