Why ESG Is a Tough Topic

Because the technology hardware company HP was #1 in Newsweek’s ranking of “America’s Most Responsible Companies 2023,” we can assume that their ESG (environmental, social, governance) policies are best of the 500 corporations that were rated.

Not necessarily.

ESG Ratings

In the Newsweek survey these were the top five:

However, in its ESG ranking, Investor’s Business Daily did not include HP and it placed Merck at #9. They said they included a superior stock rating in their computations:

Meanwhile Yahoo Finance had its Top 12 ESG list (which they got from Insider Monkey):

1. Alphabet Inc. Class A (NASDAQ:GOOGL)

2. Intel Corporation (NASDAQ:INTC)

3. Microsoft Corporation (NASDAQ:MSFT)

4. Salesforce Inc. (NYSE:CRM)

5. Bank of America Corporation (NYSE:BAC)

6. PayPal Holdings Inc. (NASDAQ:PYPL)

7. Apple Inc. (NASDAQ:AAPL)

8. NVIDIA Corporation (NASDAQ:NVDA)

9. Verizon Communications Inc. (NYSE:VZ)

10. Cisco Systems Inc. (NASDAQ:CSCO)

11. PepsiCo, Inc. (NYSE:PEP)

12. Exelon Corporation (NASDAQ:EXC)

ESG Consistency

You can see the problem.

A 2022 paper from an MIT group at its Sloan School listed the three areas that create inconsistent ESG ratings.  They called them scope divergence, measurement divergence, and weight divergence. With scope divergence, ratings depend on what you choose to measure. For diversity, for example, one group might look at labor turnover while another does not. Then, creating measurement divergence, they could use different indicators to measure the same phenomenon. With labor turnover, some could input the number of years an employee was at a firm when measuring turnover or they could exclude people who were fired. Then, adding to the confusion, you have to decide how much to weight a number.  In the 48 page MIT paper, they used 709 indicators that they grouped into 64 categories.

We should add that the SEC is our featured image because they have entered the debate. At their website, they received thousands of comments about how they should regulate ESG reporting. At this time, they have postponed their final report.

You can see why.

Our Bottom Line: Marginal Analysis

Economists tell us that we are always thinking at the margin. Defined as where something extra happens the margin can be tangible or imaginary. It can be an extra luggage fee from an airline, extra minutes of sleep from a snooze alarm, or extra calories. When students decide how much extra time they need to study, they are thinking at the margin as is the Congress when it votes on an infrastructure spending plan.

We are also thinking at the margin when we determine a firm’s ESG score. The margin is our focus because we care about the extra emissions a firm creates and how much extra it is doing to mitigate its environmental impact. Similarly, a firm’s social impact and governance take us to the margin.

Indeed, all ESG measurement is at the margin.

My sources and more: For starters, I recommend this paper. Then today’s ratings were at Newsweek,  Investor’s Business Daily, and Yahoo Finance, I also suggest that you take a look at this econlife post (from which we got today’s Bottom Line.)

Our featured image  is ANDREW KELLY/REUTERS via the Wall Street Journal.