Photo by Andres Siimon on Unsplash

Is the ESG meme about to self-destruct? Or can objective critiques of companies come to its rescue?

A few weeks ago I wrote about greenwashing and ESG reporting in the context of Rio Tinto Zinc’s spectacular fail in blowing up Juukan Gorge while claiming that they had an inclusive community policy.

Following this and the recent Boohoo scandal (it was convicted of paying workers below the minimum wage) there has been a spate of opinion pieces in the financial press expressing scepticism about the value to investors and society of ESG (environmental and social governance) reporting.

Robert Armstrong in the Financial Times wrote, discussing BlackRock’s claim that sustainability and climate integrated portfolios can provide better risk-adjusted returns to investors: “There are good reasons for investors to own portfolios that align with their values. This supposed win-win proposition is not one of them however.”

Take this point too: just 6.7 per cent of European funds labelled as sustainable explicitly screen out or reduce exposure to fossil fuels. How are the rest sustainable?

A plastic producer who goes carbon neutral is still producing plastic. A tobacco company can give millions to charity but still deal in death. An coal producer can buys lots of carbon credits but still produces coal (just check this out how this Indian coal-producer scored 94 per cent on an ESG score).

They can all feature in ESG portfolios but really, are they part of the solution?

Enter the machines…

If ESG reporting can’t help investors make an ethical or green choice what can? Well, a new product has just launched which its creators hope will tackle this criticism.

London-based FinTech company Util has used AI to develop a proprietary machine-learning technology that measures the ways companies impact the 17 UN Sustainable Development Goals and 2000 other sustainability themes.

Fintech – a portmanteau of “finance” and “technology” – refers to any business that uses technology to enhance or automate financial services and processes.

Util’s chief executive officer Patrick Wood Uribe

Util’s chief executive officer Patrick Wood Uribe says, “We are different. We begin not from internal or even external reports on companies but by looking at their revenues from products and services, the money they generate. How do these products and services impact both positively and negatively on the sustainable development goals (SDGs)?

“For example, SDG13 is about climate action and within it there are actions to support greenhouse gas emission reductions, and the individual gases themselves. We bring this together by looking at evidence in 125 million peer-reviewed academic articles to arrive at a scientific consensus that captures the complexity of the trade-offs between the different goals.”

A tobacco company might have very favourable internal policies but deal in polluting products…”It might employ thousands of people but kill or reduce the health of millions”

Are electric vehicles an ESG-compliant product?

Uribe gave the example of electric vehicles. “They reduce greenhouse gas emissions, but they are no safer than traditional vehicles. So, we can see trade-offs between climate action and health-related SDGs.”

Impact analysis of BlackRock’s exposure to the 17 sustainable development goals. The radial chart shows the degree to which its portfolio positively and negatively aligns to each SDG. Since it is exposed to a broad range of product categories, there are instances of both positive and negative alignments.

He said that a company might have very favourable internal policies but deal in polluting products, and gave the extreme example of a tobacco company. “It might employ thousands of people but kill or reduce the health of millions, so we look at the other dimensions of what they’re doing in the world. This data allows investors to see where the burden of proof is.

“It applies to many companies who make (green or ethical) claims, but if they are in an industry that is at odds with the claims then investors know which questions to ask.”

What about water security?

I asked him whether this system can evaluate the impact of companies on crucial topics such as water security, which is not directly addressed by the SDGs. “Water is one area where we see it crops up in different SDGs indirectly, for example climate change has a huge impact on water scarcity. We can detect this impact.

“Ultimately we want to look in a more comprehensive way at companies’ performance.”

Does he expect companies to change their behaviour as a result? “Eventually I would hope so. We have five years data and I’ve been pleased to see how some companies have changed dramatically in their performance against the SDGs in that time.”

The advantage for investors

The advantage of this type of approach to analysing companies’ performance is really for investors.

They would never have the time to make such complex comparisons and analyses of trade-offs as the software can do extremely quickly.

“Hopefully it will mean that they can make better informed decisions,” says Uribe.

We do have to trust the algorithms however, that they are able to pick up the kind of things that we would expect them to.

There’s a growing backlash to ESG ratings on the basis of quality and availability. Unless more objective ways to measure ESG stocks’ performance such as this gain traction, investors may well be deterred from even looking in their direction.

Impact analysis of Adani’s exposure to the 17 sustainable development goals.

David Thorpe is the author of the books The ‘One Planet’ Life and ‘One Planet’ Cities. He lives in the UK.

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