The discourse on ESG ratings goes on

The discussion about the usefulness of ESG ratings seems never ending. While the importance of ESG targets is on the rise, companies that apply find themselves treated unfairly by rating agencies. This raises the question: How do we measure success in sustainable action?

The discourse on ESG ratings goes on

Protest against ESG ratings 

Once a year, the S & P 500 ESG Index honors companies that perform excellently on ESG-related topics. ESG, short for Environmental, Social, and Governance, describes a scheme dedicated to sustainable action. The index helps investors choose where to invest their money based on sustainable activity. ESG investing describes the choice of investments based on ESG goals by a company. And it has grown a lot over the last couple of years. More and more investors are cautious about their investments. In order to have long-term financial benefits from it, they incorporate much more than just profit into their decisions. (We’ve actually tackled this topic before talking about Chinese climate activities and the pressure on investors. So, if you want, check out that article here.)  

Surprisingly, it does not look so different from the original S & P Index which features the 500 companies with the highest stock value in the US: More than half of the companies in the original index are also featured in the ESG index, including Apple, Nvidia and Exxon Mobil. After being removed from the index this year, Tesla’s CEO Elon Musk called ESG a scam on social media. And he is not the only one to criticize the concept behind ESG ratings. So, are ESG and ESG-based-related investing just fluff after all? 

There’s a clear relationship between ESG activities and ESG targets, right? 

Over time, especially the environmental component of the ESG concept has gotten more and more attention. Due to climate-related risks also for businesses, strategies towards low-carbon are based on more than just a governmental regulation. Companies actively set sustainability targets and investors hear them. While companies can talk a lot about their great achievements, it is rating platforms like the S & P 500 ESG Index that inform investors on their investment options in a more objective way.  

So why do so many people criticize ESG? Some research shows that many sustainable funds perform way lower than low-rated conventional funds, leaving investors with a bad aftertaste. But even if an investor is willing to make a sacrifice, research has also investigated the ESG performance – and it looks bad too. And this goes even deeper: The ESG performance of conventional companies is often higher than that of businesses emphasizing ESG. The reality on the other hand shows that sustainable funds attract way more investors. While this might let us doubt the whole truth about ESG, it sheds some light on the world of sustainability very well. Not everything that claims to be sustainable is sustainable. Plus, it is often hard to measure sustainable behavior. Ratings might not always tell the truth. Neither investors nor consumers always know the whole story behind a business.  

But what we can and should do is choose wisely. The good companies are out there. We know that because we have met a lot of incredible people on our own journey to make the world a bit greener. Some companies we have introduced on our LinkedIn channel. Check it out and learn more about how to create a carbon-free future. 

ESG could be a signpost if done cleverly 

And one more thing. There is something positive about ESG ratings too: The OECD analyzed the impact of ESG ratings on carbon reduction strategies and found that they are a great tool for investors to have a clearer overview. But a rating can only analyze what it has access to. And this is often the information that companies are required or willing to disclose to the public. The rating is supposed to be objective, but it cannot consider all facets of the business in its ESG judgment. Thus, if companies would focus on measuring their ESG activities more accurately, ratings could move from what is disclosed to was has been achieved already. Great reporting is the key to attracting investors. With this being said, happy CO2 measuring everybody! Let’s erase greenwashing from this planet altogether. 

Photo by Avi Richards from Unsplash