Companies With High ESG Scores Pollute as Much as Those With Low Ratings: Report

High ESG scores have 'no relation to carbon intensity,' study finds

Part of a carbon capture and storage facility at the SaskPower plant at Boundary Dam Power Station in a file photo. Michael Bell/The Canadian Press

Businesses that rate high when it comes to environmental, social, and governance (ESG) policies are polluting just as much as lower-scoring companies, according to new research.

The findings are based on a study conducted by ESG/climate index platform provider Scientific Beta and published by the Financial Times this week.

As part of the study, Scientific Beta analyzed 25 ESG scores from three major rating providers: Moody’s, MSCI, and Refinitiv.

The study found that high ESG ratings “have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings.”

“It doesn’t seem that people have actually looked at [the correlations]. They are surprisingly low,” Felix Goltz, research director at Scientific Beta, told the Financial Times.

Even when all three metrics—environmental, social, and corporate governance—were used, the resulting portfolios were still less green than the comparable market capitalization-weighted index, according to the study findings.

Overall, the study found that ESG metrics don’t provide an accurate picture of a company’s overall impact when it comes to the environment or carbon intensity and that “on average, social and governance scores more than completely reversed the carbon reduction objective.”

“The carbon intensity reduction of green [low carbon intensity] portfolios can be effectively canceled out by adding ESG objectives,” Mr. Goltz stated. He added that while a company may score a high ESG score if it’s “very good at governance or employee satisfaction,” there’s “no strong relationship between employee satisfaction or any of these things and carbon intensity.”

Correlation Between ESG Scores, Carbon Intensity

“The correlation between ESG scores and carbon intensity is close to zero,” Mr. Goltz continued. “If you are interested in reducing the carbon intensity of your portfolio, you are going to get that only by focusing on the carbon intensity, [otherwise] you are very quickly going to be getting green dilution.”

ESG policies were originally developed at the United Nations Environmental Program Financial Initiative 20 years ago and are used by some companies to assess their business practices and performance relating to environmental, social, and governance issues.

Multiple companies have adopted ESG policies in recent years, including asset manager BlackRock—which owns large stakes in firms such as Apple, Microsoft, and Amazon—as well as PepsiCo, ExxonMobil, and more.

Republican lawmakers and investors have repeatedly condemned such policies for prioritizing what they believe to be a more liberal agenda. They are concerned that ESG policies could harm U.S. companies in the long term and have wide-reaching implications on economic growth.

Dozens of states are currently rolling out legislative efforts to curb ESG efforts.

House Republicans, including House Judiciary Chairman Jim Jordan (R-Ohio), Rep. Dan Bishop (R-N.C.), and Rep. Thomas Massie (R-Ky.), have warned that ESG policies at BlackRock, Vanguard, and other asset managers may violate U.S. antitrust law.

Waning Support for ESG Policies

Meanwhile, the World Economic Forum (WEF) has warned of large ”job creation and destruction effects“ that will arise due to investments that facilitate the green transition of businesses, and the broader application of ESG standards, among other things.

According to the WEF, roughly 23 percent of jobs are expected to change by 2027, with about 69 million new jobs to be created and 83 million eliminated, resulting in a decrease of 14 million jobs, or 2 percent of current employment, in part due to the increased adoption and application of such policies.

Amid growing skepticism over ESG policies, a growing number of managers are reconsidering how they integrate such policies into their investment strategies, according to a recent poll by UK banking giant HSBC.

Elsewhere, data from the Sustainable Investments Institute published in June show proposals to compel corporations to act against climate change won approval from an average of 23 percent of shareholders, down from 36.6 percent in 2022 and about 50 percent in 2021.

An MSCI ESG Research spokesperson told the Financial Times that its rating index is “designed to measure a company’s resilience to financially material environmental, societal and governance risks” and “not designed to measure a company’s impact on climate change.”

According to the spokesperson, its environmental metrics, for example, are determined not only by a company’s past carbon emissions but also “its plans to curb emissions in the future, its investments to seize opportunities related to clean technology, and its management of biodiversity and nature-related risks.”

A Refinitiv spokesperson told the publication, “While very small, the correlation found in this study isn’t surprising, especially in developed markets, where many large organizations—with focused sustainability strategies, underpinned by strong governance, higher awareness of their societal impact and robust disclosure—will perform well based on ESG scores, in spite of the fact that many will also overweight on carbon.”

Representatives of Moody’s didn’t respond by press time to a request by The Epoch Times for further comment.