Elon Musk’s recent description of the ESG (environmental, social and governance) industry as a “scam” is self-serving and myopic, but investors are right to be sceptical about what they’re getting when they buy into an ESG index.
Musk was unhappy about Tesla being dropped from S&P 500′s ESG index, as was fund manager and Tesla shareholder Cathie Wood (“ridiculous”). However, while Tesla may score well on environmental matters, it’s not so hot when it comes to the S and the G in ESG, with questions being asked about the company’s transparency as well as claims regarding poor working conditions and racial discrimination.
Still, the lack of agreement as to what constitutes good practice is concerning. Unlike S&P, index giant MSCI continues to include Tesla in its ESG indices.
Such divergences are common. Unlike, for example, the credit ratings industry, there is little correlation between the ESG scores of different providers.
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A common ESG classification system might help, although the industry’s issues are not easily solved. To an extent, beauty is in the eye of the beholder. Some investors might see weapons companies as immoral, but others might cite Ukraine’s defensive needs against Russia as evidence that arms companies can be a valuable part of ESG. Similarly, some investors might be outraged by poor practices on sustainability but unconcerned about questions of governance (or vice-versa).
ESG is a very broad term – perhaps too broad. Compiling a raft of different measures into a single ESG rating is an inherently tricky task.
