In OM’s earlier post about “Appropriately Enforcing Government Regulations on Sustainability”, we investigated a strange issue where Exxon Mobil (the giant oil production conglomerate) statistically outperformed the Massachusetts Department of Environmental Protection (MassDEP). Since Exxon Mobil is a direct contributor to some of the main environmental issues we face today, and MassDEP is responsible for fixing those problems, this issue seems like there are some motivations that aren’t entirely clear: how does an oil producer outperform a regulatory institution designed specifically to reduce the negative environmental impact of other companies on environmental statistics? Something seems off.
While MassDEP works to reduce pollution, Exxon Mobil directly profits off of feeding the cycle of pollution that is directly tied into transportation. If we consider motivations, profit drives demand that Exxon Mobil make more profit from polluting—maybe by skirting some regulatory rules. There shouldn’t be any question at all about this—the statistics should show that Exxon Mobil should definitely be doing worse than MassDEP. But the reverse is apparently true. Personally, I’d question the statistics first.
PROBLEMS WITH THE STATS
Sara Meyers, Education Program Manager at MIT's Environmental Solutions Initiative (ESI) originally thought a starting point could be rating whether or not companies were environmentally minded using environmental social governance (ESG) rating. But ESG ratings have been questioned for there being “too much variety in what categories are included in different ESG ratings and in how those categories are measured for them to be of much use” (Gribkoff, Nov. 9, 2020). The same article mentions how Christopher Noga, a computer science, economics, and data science major at MIT “could only find emissions data for about a third of the companies, and many private companies did not have publicly available financial statements”. Later in that article, it mentions how “[m]ining, fossil fuel, and manufacturing companies have the highest emissions intensity scores, while technology, health care, and government agencies have the lowest scores”. I mean, that’s just logical.
So how do the statistics show the exact opposite result?
In a paper by the MIT Sloan School of Management, authors Berg, Koelbel & Rigobon (August 15, 2019) found that ESG ratings were not as concrete as had been hoped, and that a substantial divergence existed between various ESG raters for various companies. Given the fact that Meyers noted how many of the employers who filled out ESG surveys
“responded with ‘I don't know’ rather than an outright no” (Gribkoff, Nov. 9, 2020), it seems that these ESG surveys might allow for a little too much vagueness than is required.
WHY ARE THE STATS SO VARIED?
The next question that follows then, is why are vague or inadequate surveys being used to determine ESG results? According to Sustainable Insight Capital Management (February, 2016), “ESG rating agencies are…equivalent to over $20 trillion [of all professionally-run assets globally]”. One complaint from ESG data providers raises the issue of transparency, and that “proprietary research methods are commercially valuable and need to be kept secret” (p. 5).
The question that arises next naturally casts a little bit of shade on ESG data providers: which is more important to the globe—any given company’s profit margins, or the planet’s overall health?
This looks like it’s the crux of the issue: environmental social governance (ESG) ratings are apparently plagued with inconsistency. But to determine scientifically what a company’s environmental output truly is, consistency in testing across various companies is absolutely essential. Basically, the tests are screwed up, and companies like Exxon Mobil have profited off of that.
SO HOW DO WE FIX THE TESTS?
We need to repair the inaccurate ESG rating system. Jaqueline Poh at Bloomberg.com reports that “[ESG] ratings providers say their systems will improve significantly only if companies worldwide are forced to report relevant sustainability data” (December 11, 2019). She later reports how the “EU currently requires large companies to regularly publish reports on the social and environmental impacts of their operations. The China Securities Regulatory Commission is making it mandatory for all listed companies and bond issuers to disclose ESG risks by 2020. But the U.S. Securities and Exchange Commission, the financial regulator for the world’s biggest economy, doesn’t require corporate disclosure of material ESG data”.
So why don’t American companies need to regularly report ESG ratings? Moreover, why are these ratings so notoriously inconsistent? To answer these questions, we need to turn our attention to those who made the ESG rating system in the first place.
Stick around for our closing piece on this, where we finally discover who the real culprits of these stagnated testing methods really are, what their motivation is, and how to fix the issues they’ve caused!