Why not to invest in ESG?
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers.
Like many economic factors, ESG factors exhibit diminishing returns, and trade-offs exist. Some ESG factors, such as employee satisfaction, have diminishing returns to scale but linear costs. Other ESG factors have hump shape relationships and ultimately negative returns.
Investment Returns: Critics of the ESG movement frequently raise doubts about the link between ESG commitments and financial performance. Their argument suggests that prioritising ESG factors may not necessarily result in enhanced investment returns.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
Investors are withdrawing money from sustainable funds as the ESG enthusiasm of the past few years is waning amid high interest rates, poor returns, plunging renewable energy stocks, tightened SEC rules, and political backlash.
Coupled with the fact that ESG ratings are primarily self-reported, this pattern has given rise to a system where companies can superficially endorse sustainable practices, indulging in what is known as greenwashing, without having to demonstrate concrete results or genuine commitment to environmental responsibility.
Key Takeaways. Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.
In December 2022, Florida announced that it was taking $2 billion out of the management of BlackRock, the world's largest asset manager (and biggest lightning rod for ESG criticism). This was the largest such divestment thus far. These attacks have been coordinated.
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
Why is ESG a risk?
ESG Risks are those arising from Environmental, Social and Governance factors that a company must address and manage. These risks are a combination of threats and opportunities that can have a significant impact on an organisation's reputation and financial performance.
By considering ESG factors, investors get a more holistic view of the companies they back, which advocates say can help mitigate risk while identifying opportunities.
Tesla was given an ESG score of 37 out of 100, while Philip Morris was scored an 84. This isn't the first time that Musk has spoken out against ESG. In addition to tobacco companies, Tesla also scored lower than fossil fuel companies like Shell and Exxon.
Anti-ESG lawmaking efforts, which first emerged as a trend in 2021, reached new heights this year with over 150 anti-ESG bills and resolutions introduced in 37 states. Most of these bills were rejected or failed to advance, but as of December 2023, at least 40 anti-ESG laws have been enacted in 18 states.
Some of the challenges include finding the right framework, measuring and tracking performance, accessing governance data and insights, tracking stakeholder sentiment and organizational reputation, and visualizing and controlling risk mitigation. ESG issues are complex and involve a host of interrelated factors.
The core concept of ESG investing has existed for centuries, dating back to religious codes banning investments in slave labor. Fast-forwarding to the 1960s and 1970s, divestments from South Africa were first advocated to protest the country's system of apartheid.
Green hushing stems from a fear of falling foul of regulations, and/or being called to account by climate activists, so being viewed by customers as overstating eco activities, with a significant impact on profitability.
Overall ESG Rating :
Nike is average among 27 companies in the textiles, apparel & luxury goods industry.
- Volkswagen. In 2015, Volkswagen was found to have cheated emission tests by making its diesel cars appear far less polluting than they are. ...
- McDonald's. ...
- Coca-Cola. ...
- IKEA. ...
- Nespresso. ...
- Starbucks. ...
- Walmart. ...
- H&M.
- Strive U.S. Energy ETF (DRLL): $369.2 million.
- Inspire 100 ETF (BIBL): $294.5 million.
- Strive 500 ETF (STRV): $266 million.
- Inspire Corporate Bond ETF (IBD): $256 million.
- Inspire International ETF (WWJD): $193 million.
Will ESG go away?
What started as a niche concept has transformed into a mainstream approach to investing and corporate decision-making. While some skeptics have questioned the long-term sustainability of the ESG movement, it is becoming increasingly clear that ESG isn't going away.
In terms of risks, several empirical studies have established that stocks with a high ESG rating have a lower total risk than stocks with the same systematic risk but a lower ESG rating (Boutin-Dufresne and Savaria [2004]; Bauer, Derwall and Hann [2009]; Lee and Faff [2009]).
The billionaire chief of BlackRock, which manages upwards of $9 trillion in assets, pioneered the idea of ESG before it became a buzzword in investing. ESG covers a broad spectrum of topics—from climate change to diversity to inclusion initiatives.
ESG controversies score consists of 23 ESG controversy topics, including anti-competition, business ethics, intellectual property, tax fraud privacy, environmental issues, diversity & opportunity, etc. The default value of all controversy measures is 0, meaning companies with no controversies will get a score of 100%.
Examples of ESG scandals. Johnson and Johnson failed to disclose Neutrogena and Aveeno sunscreens contain the carcinogen benzene, a cancer-causing chemical (Downs et al., 2021). Johnson and Johnson announced a voluntary recall of selected Neutrogena and Aveeno aerosol spray sunscreens on July 14.
