Investopedia defines environmental, social and governance (ESG) criteria as a set of standards for a company’s behavior to be used by socially conscious investors to screen potential investments. S&P has developed an index that purports to align investment objectives with ESG values.
This is all well and good, but investors should be sure that the assessments of the index and/or fund managers are consistent with the investors own objectives.
We have previously discussed the issue of defining what is or isn’t socially responsible behavior. As noted in our blogs on April 14, 2021, titled “How Many Raisins in a Box of Raisin Bran?” and October 1, 2021 titled “How Green is Green?”, we concluded that it is what the index or fund manager says it is.
Now we have a determination by S&P that Tesla, the world’s leading manufacturer of EVs, no longer qualifies as ESG, but Exxon continues to.
This is not the place to critique the S&P decision. Sufficed to say, it is incumbent on investors and their advisor(s) to fully understand how criteria are being applied and the extent to which this is consistent with the investor’s objectives.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA