By Srinath Sridharan
S&P’s recent assignment of low ESG ratings to EV maker Tesla has prompted ponderings over ESG itself. S&P gave Tesla a lower ESG score than Philip Morris International, which manufactures Marlboro cigarettes. Can a tobacco company be more ethical and conscience-led?
There has also been a furore over this from many fund managers . By their own reaction, they should be making no investments in sin industries like tobacco, alcohol, gambling and so on and governments should stop approving the existence of these industries. While there are valid concerns about the negative societal impacts of sin industries, it is essential to explore why excluding them from ESG ratings may not be the most effective approach.
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The controversy surrounding sin industries’ ESG ratings tends to overshadow the primary objective of ESG monitoring: to encourage companies to adopt environmentally-friendly, socially responsible, and transparent practices. By fixating solely on the inclusion of sin industries, we risk losing sight of the broader picture and diluting the impact of ESG initiatives on promoting positive change across various sectors. The controversy exposes the challenges in capturing the full ethical implications of an industry. While cigarettes have well-documented health risks and contribute to millions of deaths annually, some tobacco companies have embraced corporate progressivism and implemented sustainable practices. This presents a complex dilemma for ESG ratings as it is difficult to reconcile the negative social impact of a product with a company’s other sustainability efforts.
ESG ratings are not static labels that define a company’s standing indefinitely. They serve as a starting point for engagement and dialogue between investors and companies. The science behind ESG ratings is a challenging task due to the wide range of industries, regional variations, and evolving standards. ESG metrics are influenced by numerous factors, including a company’s carbon footprint, labour practices, corporate governance, and social impact. As the science of ESG evolves, there is an ongoing debate and refinement of methodologies and standards, making it imperative to assess the metrics in a dynamic context.
Investors have diverse values and strategies. ESG aims to accommodate this diversity by providing a framework that allows them to align their investments with their sustainability priorities. While some may choose to exclude sin industries based on their convictions, others may seek to engage and influence change. ESG caters to this diversity, enabling investors to align decisions with their moral compasses.
The morality of ESG investments is subjective and dependent on cultural, social, and traditional wisdom within each market. Different regions may prioritise different aspects of ESG, reflecting their unique values and perspectives. ESG ratings are an evolving field, and it is crucial to acknowledge the limitations and ongoing efforts to refine measurement methodologies. Transparency in the ESG assessment process is essential, allowing investors to understand the underlying data, assumptions, and methodologies employed. This transparency fosters greater confidence in the ESG framework and enables stakeholders to make informed investment decisions.
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While Tesla contributes to reducing greenhouse gas emissions, the ESG framework will continue to scrutinise its supply chains, manufacturing processes, societal practices, governance practices, and so on and compare them with other companies. While sin industries may score poorly in certain aspects such as environmental impact or public health concerns, it is important to consider other dimensions where they might exhibit responsible practices. For instance, these industries may prioritise corporate governance, adhere to high labour standards, or contribute significantly to local economies.
As the ESG landscape continues to evolve, striking a balance between scientific rigour and cultural relevance is crucial. Engaging stakeholders and considering diverse perspectives will be the key to refining ESG ratings and ensuring relevance/ effectiveness.
Excluding sin industries from ESG ratings implies a black-and-white distinction between “good” and “bad” industries. However, the reality is far more nuanced. Sin industries, despite their negative societal consequences, are still legal and prevalent in many societies. Ignoring them in ESG ratings overlooks their significant economic and market influence, limiting the potential for positive change.
ESG ratings depend on transparency and disclosure. By subjecting sin industries to ESG assessments, investors gain valuable insights into their environmental, social, and governance practices. This transparency can act as a catalyst for accountability and encourage sin industries to adopt more responsible behaviours. These ratings provide a platform for dialogue, enabling stakeholders to raise concerns and push for improved practices within these industries. ESG ratings serve as a comparative measure of companies’ sustainability and ethical performance. It provides an opportunity to reward companies that demonstrate a commitment to responsible practices, even within challenging industries. Morality is a complex and subjective concept influenced by cultural norms, social values, and individual perspectives. Cultural relativism recognises that moral standards vary across cultures and societies. Applying universal moral judgment to sin industries through ESG ratings overlooks the nuances of local cultures and their historical relationships with these industries. It is crucial to acknowledge that sin industries exist within legal frameworks, fulfill market demands, and contribute to economies, even if their products are viewed as morally contentious. ESG ratings should reflect this complexity and avoid imposing a rigid moral framework.
The morality of ESG must account for the perspectives of various stakeholders. It is crucial to engage with affected communities, public health experts, and civil society organisations to understand the multifaceted impacts of sin industries. Incorporating their voices into the assessment process can lead to a more comprehensive and balanced evaluation of these industries’ moral dimensions.
Rather than adopting an absolutist stance, the morality of ESG should embrace a balanced approach that acknowledges the complexities and trade-offs involved. Recognising the cultural, social, and traditional wisdom in different geographies and markets allows for a more inclusive and context-sensitive evaluation. It enables investors to make informed decisions while respecting the diversity of moral perspectives. In the pursuit of responsible investing, it is imperative to remember that ESG scores alone cannot provide a definitive measure of a company’s moral standing. They are just one tool among many to guide investment decisions. To ensure the effectiveness of ESG, it is crucial to maintain the focus on its core intent—driving sustainable and responsible investing practices.
The writer is corporate advisor and policy researcher
Twitter: @ssmumbai
