Holes in holistic ESG indices

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The writer is a financial journalist and author ofWays and Means: Lincoln and His Cabinet and the Financing of the Civil Warr’

Suppose you had to weigh the pros and cons of each of your acquaintances: were they generous, quick to anger, patient with children? — and choose the “best”. The idea is off-putting, and the idea of ​​assigning individuals a “score” encompassing each of their character traits is extremely off-putting.

S&P Global ran into this kind of minefield when constructing its S&P 500 ESG Index. This is a selection of the best (of companies, of course, not people) in which Tesla, which has done more to reduce fossil fuel consumption than arguably any other company, has been excluded, and ExxonMobil has make the list.

The problem isn’t that S&P made the wrong choices, it’s the questionable nature of such choices. Thus, we have an index that is supposed to respect organized labor in which Amazon and Starbucks, which lay pipes day and night to crush labor campaigns, are included, while companies supplying arms to Ukraine are potentially taped off.

ESG investing has, of course, taken Wall Street by storm. More than $2 billion has been invested in funds offered by a host of groups claiming to promote the environment, social good and enlightened governance.

Many ESG funds are narrowly focused. There are funds made up of low-carbon stocks, funds that exclude tobacco, funds adhering to Catholic values ​​and Sharia. They clearly telegraph their mission as do traditional specialists in high-tech securities or banking.

But that’s not where the ESG industry is heading. The action is now in the so-called holistic indices which attempt to assess every attitude or behavior of companies and boil it down to a single metric. Call it the quality standard.

A problem with holistic indexes is the large number of categories. S&P Global Business sustainability assessment, a roadmap of what he assesses, runs to 253 pages, few of which read like an Ian McEwan. “We have just put in place [a new screen] over the past two months,” noted Reid Steadman, Global Head of ESG and Innovation. “Perspectives on sustainability are changing.”

The challenge is amplified by the inconsistency of weighing so many disparate qualitative factors against each other. There is simply no objective way to balance an exemplary record in labor relations or gender pay equity with a high carbon footprint.

Another problem is the subjective nature of the ratings. S&P has determined that nuclear energy is not “renewable”; some would disagree. It pays attention to human rights but does not exclude Apple, which counts China as a major supplier. It considers not only corporate actions, but reputations.

Given the malleability of these terms, there is confusion about what it is trying to measure. Steadman says, reductively, “we try to measure companies that meet minimum sustainability criteria.” Elaborating, he says, “We look at their environment, social and governance in a holistic way.

The S&P 500 ESG Index aims to carve out a portion of the familiar S&P 500 that represents the best of breed in the same underlying industries. ExxonMobil scored higher than its competitors Big Oil. Tesla was fired in part over allegations of racial discrimination and poor working conditions, as well as his response to Autopilot-related fatalities. Yet the process is hardly free from human judgment. S&P’s methodology “strives to take into account all relevant ESG issues” and weight them according to financial import, a subjective activity.

Was Tesla easy to get started because its CEO, Elon Musk, often offended progressive tastes? S&P says its methodology does not allow for such harm. If that’s not bias, then maybe groupthink. S&P monitors media reports and filters out “corporate controversies,” suggesting compliance is not among the traits that work against inclusion.

The group conducts dozens of conversations with wealthy investors and institutions to understand how notions of sustainability are evolving. A “vigorous debate” preceded a new restriction against arms suppliers. “We try to reflect market position,” Steadman said.

He said the shift to holistic indices reflected growing investor sophistication. To this writer, that sounds like laziness. If weapons offend you, avoid them. Ditto for oil or a failure to diversify. Outsourcing ethical judgments to a one-size-fits-all marketer is settling for the appearance of sustainability, says industry critic Tariq Fancy labeled a societal placebo. It’s less courage than conventionalism.


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