Who’s afraid of ESG?

There is a struggle to define ESG, and opponents are using that to their advantage

When Elon Musk expressed outrage last Wednesday at Tesla being removed from the S&P 500 ESG Index, he didn’t just lash out at the index provider – it was a broad attack on ESG, which he called “a scam … weaponized by phony social justice warriors.”

That series of tweets was among the latest highly public critiques of the idea of ESG, following other recent comments by former Vice President Mike Pence.

Meanwhile, some states have sought to protect the oil industry, with laws or proposals designed to prevent investment firms whose funds exclude fossil fuel holdings from managing any money in public retirement plans.

Texas, which has such a law, has been contacting fund providers, asking them to confirm whether any of their products avoid oil and gas.

In a speech he gave in Texas in favor of expanding domestic oil production, Pence said that “liberal activist investors” are pushing ESG principles that he alleged are at odds with companies’ and other shareholders’ interests.

Playing politics

If, and how, ESG managers will respond as a group to the wave of sentiment against their products is unclear. Fund providers have long characterized ESG as an apolitical component of a sound investment process.

“Financial firms and investors consider ESG criteria because they are relevant financial factors,” US SIF director of policy and programs Bryan McGannon said in a statement. “These politically motivated attacks will not likely have a meaningful impact on the use of ESG in the investment field over the long term.”

Green Century Capital Management president and ESG Clarity committee member Leslie Samuelrich noted that “using ESG data is not political but simply another tool for asset managers to evaluate how a company is managing risks.”

“When lawmakers incorrectly twist it into something to serve their own agenda, they embark on a misguided campaign to limit investor’s choices in the free market,” Samuelrich said in an email.

While an electric car maker being removed from a sustainable index seems counterintuitive, it was a decision based on multiple ESG considerations, S&P head of ESG indices Margaret Dorn wrote in a post explaining the decision.

Generally, other auto and parts makers saw their scores improve, while Tesla’s stayed mostly flat in recent years, which did not work in its favor, Dorn said.

And working against Tesla were the company’s lack of a low-carbon strategy, its codes of business conduct, claims of racial discrimination and poor working conditions and its handling of the investigation by the NHTSA into fatal accidents involving its cars’ autopilot features, Dorn wrote.

“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens.”

Timing is everything

There are two obvious reasons why ESG has recently come into opponents’ crosshairs, said Joe Sinha, chief marketing officer at Parnassus Investments – the midterm elections and the recent performance of sustainable investments that exclude fossil fuels.

“Those have created an opening [for opponents] to say, ‘Should corporations focus on stakeholders or focus on shareholders?’” he said. “They’re conflating ESG and performance and saying that’s a problem.”

ESG strategies tend to be more focused on technology holdings, which have not performed well recently in part due to rising interest rates, he noted. That underperformance is not attributable to the use of ESG, however, he said.

“ESG is no replacement for good stockpicking. That’s been our competitive advantage over the years,” he said.

“We want to be clear with people. We are working on updating our responsible investment policy … Right in there we say, ‘It’s not all performance. There is a values component to this.’”

Parnassus will likely respond to the wider criticisms of ESG broadly, though it has not been working with other firms or groups on that topic, he said.

Some investors have been asking about the pushback on ESG, he said.

Notably, BlackRock, which was a target in Texas’ anti-ESG campaign, has issued a statement about the current proxy season, saying that some of the climate-related shareholders proposals are “more prescriptive or constraining on companies and may not promote long-term shareholder value.”

That approach is not out of line with the view at Parnassus, which pushes companies for more disclosure but not necessarily for changes in how they operate, Sinha said.

Getting the necessarily information from companies can simply tell shareholders whether they should continue holding the stock, he noted.

And if companies do decide to make changes, Parnassus can help consult on how to implement them, he said.

Words matter

In a recent commentary published by Morningstar, global head of sustainability research Jon Hale noted that the language used to describe sustainable investing matters.

ESG is not well defined, Hale said, and that makes the concept easier for opponents to pick apart and coopt.

“An ill-defined concept is vulnerable to attacks and caricatures from opponents. This happens in politics all the time. When an appealing candidate or new idea emerges, opponents try to move quickly to define them in negative terms before they can fully define themselves,” Hale wrote.

“Fresh off their success vilifying critical race theory, the right is trying to give the same treatment to ESG.”

Because of the lack of certainty about what ESG is, or can be, opponents are using the term “to vilify something that is also widely supported: the idea that companies should focus on creating value for all stakeholders, address a diverse employee base and take steps to alleviate the climate crisis.”