The usually mundane world of ESG was turned on its head last week by two sector-shaking events.
First, S&P Dow Jones Indices shocked Wall Street by removing Tesla Inc. from the ESG version of the S&P 500 Index. The decision kicked off a huge kerfuffle, with many asking if the electric vehicle maker doesn’t deserve the ESG moniker, than what company does?
Then another bomb was thrown, this time by HSBC Asset Management Head of Responsible Investing Stuart Kirk. He slammed the financial community for worrying too much about climate change. The remarks led to his suspension, with HSBC saying his views are “inconsistent” with the firm.
When an icon of green energy is suddenly besmirched and a head of responsible investing downplays global warming, something isn’t right.
Maybe not. These are arguably perfect examples of the illusions (greenwashing?) increasingly perpetuated by bankers, company executives and investors who state publicly that they care about the environment, society and proper corporate governance.
“There is a huge disconnect between public perception of ESG and what it actually is, and some of the marketing in the industry has only contributed to the confusion,” said Rob Du Boff, senior ESG analyst at Bloomberg Intelligence. “At the end of the day, we need more honest conversations. However, making that point with hyperbole and bombast is clearly not the way to go.”
While HSBC’s management almost immediately distanced itself from Kirk’s remarks, the fact remains that the London-based bank still ranks as the No. 2 underwriter of bond sales for fossil-fuel companies since the Paris climate accord of late 2015, according to data compiled by Bloomberg.
Only Barclays Plc has been involved in more fossil fuel deals, which raises some questions about recent comments made by HSBC Chief Executive Officer Noel Quinn, who said as recently as May 20 that the bank is “committed to a net-zero future.”
As for the Tesla controversy, that debate has centered in part on whether ESG-focused investors should own shares of the world’s most famous electric-vehicle maker—or not?
For industry watchers like Matt Moscardi, an ESG consultant who spent almost a decade at MSCI Inc., the real problem is with the question.
“It assumes there’s such a thing as an ‘ESG stock,’” he said. “There are no ESG stocks. There’s just ESG data to use as a justification for peoples’ previously held beliefs.”
Despite views like that, the analysts at S&P Dow Jones Indices said Tesla doesn’t belong in its ESG index. In their report, they acknowledged Tesla’s unquestioned impact when it comes to the “E” of ESG, but expelled it from the S&P 500 ESG Index for alleged safety and labor intransigence, which together imply big problems for the “S” and “G.”
MSCI, the leading provider of ESG-focused indexes, still has Tesla in its indexes. MSCI officials declined to comment when contacted about S&P’s move. (And for the record: A lot more money is tied to the MSCI ESG offerings via index-tracking funds, so the market impact would be substantially more if the firm ultimately followed S&P’s lead.)
As for Elon Musk and his response? The voluble Tesla co-founder started complaining on Twitter (which he may soon own), posting “ESG is an outrageous scam.” The company has felt this way for some time now, apparently: In its recently released Impact Report, Telsa said “current ESG evaluation methodologies are fundamentally flawed.”
Tesla warned that “individual investors—who entrust their money to ESG funds of large investment institutions—are perhaps unaware that their money can be used to buy shares of companies that make climate change worse, not better.”
Perhaps. Tesla’s ESG defenestration by S&P certainly has shined a light on the underlying contradictions to many ESG ratings. The idea that one can easily find a company that’s forward-thinking from an environmental standpoint while simultaneously socially minded with laudable corporate governance can seem fantastical.
And a quick look at the mix of stocks in ESG indexes will only add to the confusion of a general public that’s been told repeatedly that ESG is the gold standard for sustainability.For example, how can Exxon Mobil Corp., one of the planet’s most famous purveyors of atmosphere-warming fossil fuels, remain in an ESG index while Tesla gets booted?
The index providers would argue Exxon has been improving from an ESG perspective relative to its peers. But anyone who cares about the environment would not be unreasonable to conclude that such reasoning leaves something to be desired.
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