(Source: Sigma Earth)
The ESG (environmental social governance) concept has appeared frequently throughout this blog. Two of the more recent blogs are from August 16, 2022, and March 28, 2023. Specific issues that ESG addresses are marked on the figure above, including aspects of DEI. You can find more entries through this blog’s search box. The issue that I am addressing in this blog is the new Trump administration’s attitude toward the concept and its impact on businesses. I’m especially interested in the differences between and similarities to the administration’s attitude toward DEI that was discussed in last week’s blog. In the March 28, 2023 blog, I tried to make the case that politicizing ESG means politicizing our future.
To my knowledge, President Trump hasn’t issued an executive order banning ESG in the way he ordered the abolishment of DEI in the federal workforce. However, changes were proposed before the 2024 elections:
The U.S. Securities and Exchange Commission (SEC) wants to prevent ESG (Environmental, Social, and Governance) funds from greenwashing. The SEC published a fact sheet with amendments calling for funds to show proof of their claims and to disclose how they choose companies and vote at annual meetings.
This news comes after Tesla was recently removed from the S&P 500 ESG Index. After all, it doesn’t make sense that oil companies, which pollute way more than Tesla, are considered by the index to have a better ESG score than a company whose entire mission is focused on sustainability. What kind of upside-down world are we in?
According to the SEC fact sheet, the ESG funds will have to also report greenhouse gas emissions related to the portfolio. It said:
“The proposed changes would apply to registered investment companies, business development companies (together with registered investment companies, “funds”), registered investment advisers, and certain unregistered advisers (together with registered investment advisers, “advisers”).”
There is no question that the structure of ESG will change during this administration, but unlike DEI, the concept will not be attacked head-on. Rather, it will face push-back in particular areas of interest such as climate change:
The impact of the recent US Presidential election on environmental, social & governance (ESG) matters is expected to be wide-ranging, with a broad pullback expected in federal rulemaking, alongside the reversal of several policies. However, legislation by certain US states, such as California, will remain in force, as will international rules requiring compliance from large US-based companies.
Just before the election, new tools were proposed to enable businesses to incorporate the environmental part of the acronym in order to qualify for the ESG Index:
ISS ESG Launches Tool to Help Banks Estimate Portfolio Emissions to Meet Sustainability Reporting Requirements; Susan Lahey July 31, 2024
ISS ESG, the sustainable investment arm of ISS STOXX, announced today the introduction of a new Industry Average Emission Intensity Data Set as part of the evolution of its suite of Climate Solutions, aimed at helping banks and insurance companies to comply with new mandatory climate reporting requirements, such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and European Banking Authority (EBA) Pillar 3 ESG Disclosures.
The new, sector-based data set enables users to estimate emissions for non-listed companies, small and medium enterprises, and other alternative investments. In particular, it enables banks to estimate emissions for large portfolios of companies where data is scarce in support of EBA Pillar 3 reporting. The data set provides industry emission intensity averages which follow PCAF recommendations on a global and regional basis and comprises NACE and GICS industry classifications.
The ESG Index is described below (https://www.sofi.com/learn/content/esg-indexes/):
An ESG index consists of companies that meet certain criteria for environmental, social, and governance performance. An ESG index can be used as a benchmark for companies in that industry, region, or sector, just as a large-cap equity index like the S&P 500 can be used as a benchmark for the performance of large-cap U.S. stocks.
The challenge in most aspects of ESG or sustainable investing, including the construction of different indexes, is that most ESG standards are voluntary and can be inconsistent in the criteria and metrics they use to evaluate companies’ progress toward ESG goals, or mitigate ESG risks.
Nonetheless, recent research suggests that ESG investing strategies perform similar to conventional strategies. By knowing some of the top ESG indexes, then, it’s possible to invest in funds that track the performance of that index, and put your money toward companies whose aim is to focus on positive environmental, social, and corporate governance outcomes.
Key Points
-
-
- An ESG index consists of companies that meet criteria for environmental, social, and governance standards.
- An ESG index may also exclude certain companies or sectors (e.g. fossil fuels, gambling, adult entertainment) or those with low ESG scores.
- An ESG index can be used as a benchmark for securities in an industry, region, or sector.
- There are some 50,000 sustainability-oriented indexes, according to Morningstar.
- Owing to inconsistency around ESG criteria and metrics, it can be difficult to evaluate companies’ progress toward ESG goals, or compare one company to another.
-
The government is not yet attacking American businesses for participating in the ESG Index. Instead, the new administration is starting to attack foreign countries whose companies are participating in these activities:
The US may use “trade tools” to retaliate against European ESG regulations that affect American companies, said Howard Lutnick, US President Donald Trump’s pick to become commerce secretary. Lutnick was referring specifically to the Corporate Sustainability Due Diligence Directive. He told Republican senators last month that he’s concerned by the extent to which environmental, social and governance regulations formulated in Brussels are impacting US businesses.
I will follow these developments and return to this issue once the administration’s attitude and the feedback from business become more transparent.
