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MANAGEMENT METRICS
PROBLEMS WITH ESG
E.S.G. gets a loud critic ... Elon Musk’s new target
Not E.S.G. enough. Lucy Nicholson/Reuters
Burgess COMMENTARY
In my assessment, ESG should never have obtained much traction in the financial community. The fact that it did is relatively easy to explain. It is a fuzzy metric that can be used for promotion while not getting in the way of the real issues that impact corporate performance and the related social and environmental impacts.
A metric that embraces social impact, environmental impact and profit performance would be very good for independent investors, but not so good for decision making executives and insiders. Comparing a typical 'company sustainability report' or CSR report with the corporate financial reports and filings is a joke, and the fact that it has not been called out as such suggests a level of complicity or stupidity, neither of which is desirable.
The Musk story is attracting some attention ... but it is mainly for the wrong reason. Musk is widely regarded as brilliant but also seriously ego-centric. He is criticizing ESG and getting attention, but not really for the right reason.
I trained as a Chartered Accountant in London in my 20s and I have a high respect for the way a double entry financial accounting system works. In the subsequent half century I have failed to influence the accounting profession in any significant way to make modern accounting more fit for purpose by embracing coherent ways of reporting social impacts and environmental impacts along the same lines that money profit is reported.
Doing this in a way that will be respected is not easy, but it can be done. Sadly, not many accountants who have done their training mainly in a university setting are aware of the vast amount of useful information that is available in operational settings. Cost accounting and industrial engineering are rarely talked about. What do young accountants know about 'standard costing'?
And perhaps even more important, what do 'sustainability managers' know about financial accounting and reporting.
Peter Burgess
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E.S.G. gets a loud critic ... Elon Musk’s new target
Andrew Ross Sorkin ...DealBook
May 19, 2022
Elon Musk is the latest prominent figure to push back on one of the hottest trends on Wall Street and in corporate America: E.S.G., the idea of valuing companies based on how they follow environmental, social and governance principles, rather than just chasing profits. Musk called E.S.G. a “scam” after S&P Global, the manager of a popular E.S.G. index, publicized that it had kicked Musk’s electric car company Tesla out of the index, The Times’s Jack Ewing and DealBook’s Stephen Gandel report.
Musk complained on Twitter that S&P gave high marks to Exxon Mobil, one of the world’s largest producers of fossil fuels, “while Tesla didn’t make the list!” He added: “E.S.G. is a scam. It has been weaponized by phony social justice warriors.”
E.S.G. has been facing a growing backlash. Earlier this month, former Vice President Mike Pence, a potential 2024 Republican presidential contender, said he wanted to rein in E.S.G., claiming it elevated left-wing goals over the interests of businesses and their employees. BlackRock, an outspoken leader in sustainable investing, has said it would support fewer shareholder proposals on climate issues because many are too “prescriptive.” And earlier this year, the private equity executive Steve Schwarzman, among others, blamed E.S.G. for creating a credit crunch for energy companies, which he said was a contributor to the soaring price of oil.
Part of the problem is that E.S.G. is not well defined. Shortly after Russia invaded Ukraine, two Citigroup stock analysts argued that weapons manufacturers and defense contractors should qualify as E.S.G. investments, because their products helped defend democracy and preserve peace. Others called that absurd.
For S&P, there is more to consider at Tesla than just its environmental record. S&P said it also factored in things like allegations of racial discrimination and poor working conditions, as well as Tesla’s handling of investigations into Autopilot crashes. “Tesla is just simply not an open-and-shut E.S.G. case,” Jon Hale, who directs sustainability research at the mutual fund tracking firm Morningstar, told DealBook. “While it’s clear the company’s product is beneficial to the environment, Tesla is now a big company and it also has an impact on employees and customers, and those issues concern E.S.G. investors.”
What is E.S.G. for, anyway? Some of the E.S.G. pushback falls along predictable political lines. But there also seems to be confusion over the broader goals of the approach, even among its fans. The older approach of so-called socially responsible investing meant steering clear of tobacco companies, gun makers and other businesses that profit in morally questionable ways.
The E.S.G. approach, by contrast, is less focused on whether a company’s products are good for society. A core principle is that businesses whose managers care broadly about issues like the environment and diversity will produce solid investment returns. That explains how Exxon can end up in an E.S.G. index, if its leaders are seen to be taking serious steps to reduce its environmental impact, and how Tesla might not, despite the millions of gallons of gas its cars are not burning. The nuance there is easily lost on, say, Twitter, where in a later tweet Musk called Tesla’s removal “a clear case of wacktivism.”
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