New Energy Weekly Update – July 15, 2022
Cracking Down on Greenwashing and Clearing Up What ESG Means
On May 18th, billionaire Elon Musk took aim at green investing. He tweeted:
“ESG is a scam. It has been weaponized by phony social justice warriors.”
ESG stands for “environmental, social, and governance”. And ranking ESG is all the rage today. The problem is it can be very subjective.
The reason Musk took issue was that the S&P ESG Index dropped Tesla (NYSE: TSLA) from its ranks over the company’s working conditions and overall business. As this Barron’s article outlines:
In Tesla’s case, few dispute that its cars play an important, perhaps critical, role in pushing the auto industry toward becoming greener. But S&P’s exclusion is not driven by Tesla’s cars, but because of concerns around issues like Tesla’s working conditions, how it handles investigations into crashes, water use, its supply chain, and the company’s lack of a formal low carbon strategy and codes of business conduct.
That poor press from Musk made the news cycle go mad for a few weeks. And it pushed ESG into the spotlight. The problem, as CNBC’s interview with Rebeca Minguela, CEO of Clarity AI points out, is understanding what ESG means.
“Elon Musk might have thought that ESG was measuring climate impact. And that’s why he was concerned about Tesla dropping off the ESG sustainability index and Exxon being in that index.
But that’s a good sign [of] … how Elon Musk is not understanding what ESG means … And he’s an incredibly smart person, right? So I guess that, if that happens to him, that happens to many other investors.
So that is why it’s so important that they have tools and a better understanding of what ESG really means and what the different frameworks are trying to measure.”
That seems like a really important piece of information – What does ESG really mean and what does it actually measure?
Turns out, we could have a legal definition soon.
According to Bloomberg, the U.S. Securities and Exchange Commission (SEC) is cracking down on “greenwashing”. Institutions like Deutsche Bank AG, Bank of New York Mellon Corp. and Goldman Sachs Group are both under investigation.
According to law firm Simmons & Simmons partner and global head of ESG, Sonali Siriwardena,
“I believe these are the first ripples of a wave of regulatory interventions that we are likely to see in the coming months,” Siriwardena told Bloomberg. “The number of ESG-focused funds has soared, so it’s no surprise that the regulators want to set expectations to maintain market credibility.”
And there are technological innovations coming online to help. Util, a data service, created models based on the United Nations’ 17 Sustainable Development Goals. The company used machine learning to examine over 6,000 U.S. registered funds.
According to the Bloomberg article, Util’s model ranked these three funds highest out of the 6,000 it reviewed:
- Global X Hydrogen (HYDR)
- Fidelity Clean Energy (FRNW)
- Invesco Solar (TAN)
Machine learning is probably the best way to go about this kind of ranking. However, it doesn’t help with a clarity of discussion. And that’s where we see Mangrove Investor readers playing a role.
We simplify and de-politicize this movement as “for the good”. But it really captures what this movement intends – corporations must contribute to the well being of their communities, locally and globally.
Here in the U.S. the Citizens United ruling declared that corporations have the right of free speech through capital. It makes sense then, that they must also be held accountable for their behavior. And the only language they respond to is capital.
We must use a market-based approach to influence the behavior of companies. And we can do that by selecting which companies we invest in, based on what good they do.
Every dollar is a vote – no matter what you buy…stocks, groceries, automobiles, etc.
That’s why green washing is so prevalent. They know if they lie to you, they can fool you. And your investment dollars help them. That’s why we need to have a clear understanding of each company before we buy.
We’ll keep following this story as it develops.
Have a great weekend.
For more on ESG and what it means please check out the following Grove U articles: