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ESG investing
OpinionComment
Chee Yik-wai
Chee Yik-wai

The View | ESG is not a scam, but much work remains to define and standardise it

  • The lack of a coordinated approach to define these now common corporate obligations is confusing investors, and the reliance on self-reporting makes it easier for companies to resort to greenwashing
  • Elon Musk’s anger at Tesla being dropped by an ESG index is not without basis

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A Tesla electric car is charged in Berlin on May 27. Tesla, a company at the forefront of making technological breakthroughs to reduce the use of fossil fuels, has been dropped from the S&P 500 ESG index. Photo: AFP
Chee Yik-wai
ESG (environmental, social and corporate governance) obligations have been shaking up the world of finance. As governments and societies discuss how to come out of the Covid-19 pandemic stronger and greener, prominent international bodies and organisations such as the United Nations and World Economic Forum are promoting ESG rules as the future of investment focus.
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Thus, eyebrows were raised when Tesla boss Elon Musk called ESG a “scam” after the company was dropped from the S&P 500 ESG index, pointing out that oil giant ExxonMobil remains on the list. Meanwhile, according to MSCI’s ESG Ratings and Climate Search Tool, for example, Tesla has an “A” rating.

To see Musk’s outburst as just a rant by the world’s richest person would be missing the point. He is not the only influential global figure to have criticised the disorganised and confusing ESG rating mechanisms.

Take it from billionaire activist investor Carl Icahn, who has called Wall Street’s ESG efforts “the biggest hypocrisy of our time”, with loopholes for companies to cash in without concern for actual societal impact. Social Capital founder and CEO Chamath Palihapitiya even went so far as to call ESG investing a “complete fraud”, a “joke”, and “a lot of sizzle, no steak”.

Despite its relevance to a more sustainable global economy, ESG has come under a lot of criticism, some of it legitimate. The main problem is the lack of a coordinated and standardised approach to define it.

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Currently, the task of defining ESG has so far been left to the rating agencies, each using their own methodology. While it may be easier to decipher the progress needed for a company to achieve its environmental and social goals, the “governance” component in ESG often lacks common agreement. Who gets to define what good corporate governance is?
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