Some Reflections On An RSC Memo, ExxonMobil, And Tesla

Sustainability Some Reflections On An RSC Memo, ExxonMobil, And Tesla Robert G. Eccles Contributor Opinions expressed by Forbes Contributors are their own. Tenured Harvard Business School professor, now at Oxford University.

New! Follow this author to improve your content experience. Got it! Aug 4, 2022, 05:55am EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin On July 27, 2022, The Republican Study Committee published a Memorandum titled “The War on American Energy: Ground Zero” expressing its concern about Environmental, Social, and Governance (ESG). The memo was sent by RSC Chairman Rep.

Jim Banks (R-03), Ranking Member of the Small Business Committee Rep. Blaine Luetkemeyer (MO-03)), and Reps. French Hill (AR-02), Andy Barr (KY-06), and Bill Huizenga (MI-02).

The memo starts by explaining that “ESG refers to the progressive scheme through which the Left pressures corporate America to take positions on social and political issues that have nothing to do with business. ” In an exclusive piece published on the same date as the memo, Breitbart opined that “ESG funds advance leftist goals such as climate change, and diversity, equity, and inclusion. ” I really doubt that leftists have a of goal creating climate change, thereby exacerbating material risk to companies.

Rather, they think it’s a problem that needs to be addressed. I suspect that many on the Right recognize it is a problem as well. Honest differences can exist about the best way to address it.

Name calling isn’t a way of doing so. Similarly, diversity, equity, and inclusion (DE&I) has become emblematic of the broader culture war going on in this country. Let’s leave DE&I aside since the focus of the memo is the claim that ESG is going to war with the American energy industry.

The memo further argues that “Companies should focus on maximizing profit for their shareholders, instead of paying for their employees’ travel expenses to get abortions. ” Abortion is one of the most polarizing issues in America today and the language in the memo clearly reflects one point of view. But since the focus of the memo is American energy, I’m not sure why it’s mentioned and so I will leave this aside as well.

But I do want to note that the Breitbart piece defining ESG links to the CFA Institute . Here is the first sentence in how the Institute defines ESG investing: “Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ” This sounds like smart investing.

It also sounds like the Breitbart reporter Sean Moran didn’t bother to read what’s on that link he put in his piece. waving flag, us republican party elephant emblem, background, 3d illustration getty In a previous piece I announced my commitment to meet with anyone in the GOP who has concerns about ESG and “Woke Capitalism. ” Here I would like to extend this to the authors of this memo.

And in the spirit of seeking to lay some groundwork for a dialogue, let me start with points in the memo I agree with. The Representatives cite a FINRA Investor Education Foundation and NORC at the University of Chicago (emphasis mine) study based on a survey of 1,228 retail investors which found that “only 28 percent of investors report being at all familiar with ESG investing. Only 24 percent of study participants can correctly define ESG investing, and only 21 percent know what the letters in ESG stand for.

” This is obviously quite problematic if these investors are buying a fund with any kind of “ESG” label and they don’t know what it means. Blame lies in some combination of the retail investor, their financial advisor (if they are using one), and the firm marketing the fund. MORE FOR YOU Is Carbon Capture Another Fossil Fuel Industry Con? Sustainable Fashion Wants Brands To Redefine Business Growth Trouble With Predicting Future Of Transportation Is That Today Gets In The Way Another valid concern raised in the memo comes from citing a Wall Street Journal article that notes that ESG ETFs are 43 percent more expensive those not labeled as such.

Perhaps there is some justification for this, but this would require clear language on the part of the firm selling the fund to acknowledge it and explain why. It’s also worth noting that some of these ESG funds actually hold oil and gas stocks . I can see the logic for this given the business model transformation some of them are undertaking in order to continue to deliver long-term shareholder value in the energy transition.

But given the different views on oil and gas stocks, such holdings should be disclosed. And, of course, there’s the issue of performance. There is no clear conclusion here since it depends on time frames.

Some ESG funds did well when tech stocks were booming and oil stocks were lagging, but the reverse is now sometimes true. Not always. The Parnassus Endeavor Trust fund which doesn’t hold oil and gas companies has outperformed the comparable SPDR® S&P 500 ETF Trust over a 15 year period of time.

For those investing for the long term, it’s simply too soon to tell whether so-called ESG funds overperform or underperform since most of these funds are rather new. A further complication, as noted in another article from Investor’s Business Daily cited in the memo, is that “The question of performance boils down to the wide variation of what’s considered an ESG company. ” More on this below.

What the memo fails to say is that the study also found that “Most retail investors believe investing is a way to make positive change in the world. ” This is at the center of the current debate about whether “ESG investing” can make the world a better place without sacrificing returns. There is no denying the fact that there is a tremendous amount of greenwashing in the marketing of ESG funds with claims about “making the world a better place” when in fact it’s not clear at all that they are.

An ESG fund holding a bunch of high tech stocks and no oil and gas stocks doesn’t solve the problem of climate change. Thus, the situation is even worse than the memo suggests. With the now-famous DWS whistleblower, Desiree Fixler, I have written about how to improve clarity regarding ESG investing—but without making it a political punching bag.

Fortunately, regulators such as the SEC and the U. K. Financial Conduct Authority are looking to instill some “truth in labeling” on these funds.

Not surprisingly, there are also some points in the memo where I have a different view, one in between “ESG Can Save the World!” and “ESG Could Be the End of the World!” After describing ESG as “the progressive scheme through which the Left…” the memo claims ESG doesn’t work since “A company’s ESG ratings does not reflect its environmental impact—Exxon Mobile (sic) received a higher ESG rating than Tesla. ” There are three basic problems with this statement. First, ESG isn’t just about the environment.

And I note the obvious irony of depicting ExxonMobil as bad for the environment while Tesla is good for it. This irony comes from the second problem—the memo’s failure to accept the simple fact that in an investment context, ESG is simply about quantifying the material issues that matter to company profitability and long-term value creation for shareholders. These are industry specific.

The Material ESG Issues for Oil & Gas—Exploration & Production Fianna Rezuano For an oil and gas company doing exploration and production, the Sustainability Accounting Standards Board (SASB), of which I am the founding Chair, has identified 10 material issues, four of which are environmental: GHG Emissions, Air Quality, Water & Wastewater Management, and Ecological Impacts. These are topics an oil and gas company needs to manage in a responsible way. A high ESG rating for ExxonMobil simply means it is doing so on these issues and the other six.

It is not a judgement about whether ExxonMobil is a “good” or “bad” company in some fundamental existential sense. Material ESG Issues for Transportation—Automobiles Fianna Rezuano According to SASB, there are only four material issues in the automotive industry and none of them are environmental: Product Quality & Safety, Labor Practices, Product Design & Lifecycle Management, and Materials Sourcing and Efficiency. The reason Tesla gets a low ESG rating is because of extensive problems with Labor Practices including a stressful working environment , racial discrimination , and an anti-union attitude on the part of Mr.

Elon Musk. In one of his countless Tweets, Mr. Musk complained that “Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list! ESG is a scam.

It has been weaponized by phony social justice warriors. ” Sounds to me that Mr. Musk is trying to deflect attention from the material ESG factors that matter to his industry.

I’m also struggling with the notion that “phony social justice warriors” are behind ExxonMobil’s high ranking given the many concerns these “warriors” have about ExxonMobil. Mr. Musk, the RSC, and others in that camp are the ones who are weaponizing ESG.

BERLIN, GERMANY DECEMBER 01: SpaceX owner and Tesla CEO Elon Musk arrives on the red carpet for the . . .

[+] Axel Springer Award 2020 on December 01, 2020 in Berlin, Germany. (Photo by Britta Pedersen-Pool/Getty Images) Getty Images Third, in its ExxonMobil/Tesla comparison the RSC confounds ESG with impact. In fairness this is a common practice across the entire political spectrum.

The distinction is a simple but important one. ESG is about a company’s operations and activities. Impact is about the positive and negative externalities of a company’s products and services.

Applauding Tesla for creating electric cars that don’t burn oil and gas is to recognize the positive impact of its products in reducing carbon emissions. Although these products require the mining of metals which makes Materials Sourcing & Efficiency a material issue, an issue on which Tesla does not disclose. Criticizing ExxonMobil for being an oil and gas company is based on the negative impact of carbon emissions from the use of its products, such as energy production for electricity, transportation, and certain manufacturing industries (the top five being paper, food, petroleum refining, chemicals, and metals/minerals).

Oil and gas companies alone can’t solve this problem since alternative sources of energy must be found. Here too there are vast differences of opinion about the urgency and best way of doing so. This is a discussion Americans across the political spectrum need to be able to have with each other if we are going to address a problem that matters to all of us, regardless of which state we live in.

Critics of ESG from the Left complain that these ratings fail to address the issue of impact and are only focused on issues that matter to shareholder value creation. Thus, we have the curious situation where the Right is claiming that ESG hurts profitability while the Left is complaining that ESG is only about profitability. Which probably means that the term ESG is no longer a useful one for a productive conversation about creating shareholder value in a way that isn’t destructive to the world we all live in.

Sadly, I don’t think the term ESG will disappear any time soon because it has entered the cultural wars in the political realm and is being weaponized by both the Left and the Right. The extremes on both sides are holding onto it for reasons that have nothing to do with shareholder value creation. Follow me on Twitter or LinkedIn .

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