Across the world, the hottest investing theme for the past few years has been ESG i.e. funds where the investor purports to be making investments with Environmental, Social and Corporate Governance factors being central to choosing the assets which will go into the fund. However, over the past month, intelligence authorities across the developed world have moved into investigate and arrest some of the most ESG fund managers. This scathing article in Bloomberg explains why ESG has aroused the ire of sensible people.
It all started with a firm called MSCI and its boss, Henry Fernandez: “For more than two decades, MSCI Inc. was a bland Wall Street company that made its money by arranging stocks into indexes for other companies that sell investments. Looking for ways into Asian tech? MSCI has indexes by country, sector, and market capitalization. Thinking about the implications of demographic shifts? Try the Ageing Society Opportunities Index. MSCI’s clients turn these indexes into portfolios or financial products for investors worldwide. BlackRock Inc., the world’s biggest asset manager, with $10 trillion under management, is MSCI’s biggest customer.
Sales have historically been good, but no one was ever going to include MSCI itself in an index of sexy stocks. Then Henry Fernandez, the only chairman and chief executive officer MSCI has ever had, saw it was time for a change. In a presentation in February 2019 for the analysts who rate MSCI’s stock, he said the company’s data products, the source of its profits, were just “a means to an end.” The actual mission of the company, he said, “is to help global investors build better portfolios for a better world.””
And that’s how the ESG genie was let out of the bottle. Soon fund managers across the world, including in India, were running around raising trillions of dollars for ESG funds. No prizes for guessing which firm benefited the most from this craze: “No single company is more critical to Wall Street’s new profit engine than MSCI, which dominates a foundational yet unregulated piece of the business: producing ratings on corporate “environmental, social, and governance” practices. BlackRock and other investment salesmen use these ESG ratings, as they’re called, to justify a “sustainable” label on stock and bond funds. For a significant number of investors, it’s a powerful attraction.”
So what’s the problem with all this? Why shouldn’t ESG fund managers and MSCI be allowed to make a bit of money? The problem is that ESG is not what it appears to be: “There’s virtually no connection between MSCI’s “better world” marketing and its methodology. That’s because the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders. MSCI doesn’t dispute this characterization. It defends its methodology as the most financially relevant for the companies it rates.
This critical feature of the ESG system, which flips the very notion of sustainable investing on its head for many investors, can be seen repeatedly in thousands of pages of MSCI’s rating reports. Bloomberg Businessweek analyzed every ESG rating upgrade that MSCI awarded to companies in the S&P 500 from January 2020 through June of this year, as a record amount of cash flowed into ESG funds. In all, the review included 155 S&P 500 companies and their upgrades.”
In India, we have noticed the some of the companies which regularly attract investments from ESG fund are amongst India’s most corrupt and most polluting companies (you could call them Evil Sociopathic Goondas). Bloomberg says that thanks to MSCI, this problem is not restricted to India: “The most striking feature of the system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all. McDonald’s Corp., one of the world’s largest beef purchasers, generated more greenhouse gas emissions in 2019 than Portugal or Hungary, because of the company’s supply chain. McDonald’s produced 54 million tons of emissions that year, an increase of about 7% in four years. Yet on April 23, MSCI gave McDonald’s a ratings upgrade, citing the company’s environmental practices. MSCI did this after dropping carbon emissions from any consideration in the calculation of McDonald’s rating. Why? Because MSCI determined that climate change neither poses a risk nor offers “opportunities” to the company’s bottom line.
MSCI then recalculated McDonald’s environmental score to give it credit for mitigating “risks associated with packaging material and waste” relative to its peers. That included McDonald’s installation of recycling bins at an unspecified number of locations in France and the U.K.—countries where the company faces potential sanctions or regulations if it doesn’t recycle. In this assessment, as in all others, MSCI was looking only at whether environmental issues had the potential to harm the company. Any mitigation of risks to the planet was incidental. McDonald’s declined to comment on its ESG rating from MSCI.
This approach often yields a kind of doublespeak within the pages of a rating report. An upgrade based on a chemical company’s “water stress” score, for example, doesn’t involve measuring the company’s impact on the water supplies of the communities where it makes chemicals. Rather, it measures whether the communities have enough water to sustain their factories. This applies even if MSCI’s analysts find little evidence the company is trying to restrict discharges into local water systems.” In short, ESG has become a way for a small group of people to make a lot of money whilst doing very little work. Hence the regulatory crackdown.
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