Say goodbye to ESG ratings

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Here’s the intro from this note from Sasja Beslik about the future of ESG investing:

It’s time to say goodbye to the current ESG ratings used by the financial industry across the world. It’s a goodbye that’s long overdue, an easy goodbye, almost like a walk in the park. Because we’ve seen enough.

The current ESG ratings, provided by a number of firms around the world, are hurting the very intent of ESG investing. Why? Well, because today’s ESG ratings tell you nothing about how sustainable the business model of a firm is, or about how sustainable its products and services are. What they tell you is whether the company ticks the boxes of reporting on its own corporate conduct. There is no link, and I mean it, no link between a company’s corporate business growth strategy and their sustainability ratings.

Whoever views the current ESG ratings as nothing more than an annual indicator on corporate conduct, and nothing more than that, is right. And for the rest, and for the companies themselves, they shouldn’t even look at the ESG ratings. They are not only misleading, but also costly. It costs a lot to have access to these ratings, and if you are running a company, well, then you will find yourself reporting on a zillion indicators that do not mean a single thing for the investor who is making the investment decisions. An absurd reporting task bound to discourage anyone working with it.

As ESG ratings are constructed today, they give you a false and, in many ways, severely incomplete picture of how sustainable the business model of a company is. At the same time, I do understand why they are used. The financial industry loves lazy scalable solutions, the ones you can lean on without taking any responsibility. “This company has been given an A-rating by XXXX.” But that very company might be depleting natural resources faster than the Silicon Valley tech guys are playing the roulette in Vegas. The financial industry loves to pretend that it all makes sense as long it does not impact the real intent with the investments, and that is to make money and a lot of it. If it is packed as sustainable, very fine. “We have external ratings we use for informing our investments decisions”. Sayonara, Goodbye, Arrivederci, Hejdå. Time to move on. For real.