Musk Calls It "the Devil". Is ESG A "scam"?

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Tesla CEO Elon Musk's public criticism of ESG rating is becoming increasingly fierce. In April this year, after musk publicly accused the enterprise ESG rating on twitter that it was "the incarnation of the devil", on May 19, musk continued to launch tweeting and shelling, "the S & P 500 index listed ExxonMobil as one of the 10 enterprises with the best performance in ESG, while Tesla did not even make the list. ESG is a fraud and has become the weapon of hypocrites of social justice."

"Devil" and "scam", why is the ESG rating aimed at assessing the sustainability and long-term return ability of enterprises so unbearable in Musk's eyes? Because he thinks Tesla has not obtained a fair ESG evaluation.

Taking the rating of Morgan Stanley Capital International (MSci) as an example, Tesla only achieved the average level among 41 automobile companies, and it is also considered as "impeding the realization of global climate goals". In April, the S & P 500 ESG index of S & P even excluded Tesla from the portfolio.

Tesla recently released its 2021 impact report, saying, "ESG only emphasizes the risk and return of investment attributes, ignoring the positive impact on the world. These ratings are used by fund managers to help determine the investment direction, and only focus on measuring the value of risk or return."

Tesla said that "ESG ignores the positive impact on the world". Figure / Tesla 2021 impact report

Is this conflict between star entrepreneurs and ESG the "pot" of ESG or musk's fault? What happened to ESG?

When "gifted students" encounter the college entrance examination

In fact, this is a story of "gifted students" encountering the college entrance examination.

"As an evaluation agency, we must first consider the comprehensiveness of the rating. ESG is like comprehensively considering a person's moral, intellectual, physical and artistic work. You are a special student in one aspect, but your overall score is not necessarily very high." According to Sunxi, chief ESG officer of menglang Sustainable Digital Technology (Shenzhen) Co., Ltd., Tesla is a typical carbon reduction "expert".

Tesla's 2021 impact report shows that Tesla has saved 8.4 million tons of carbon dioxide equivalent in the use of cars and solar panels worldwide in 2021, which is equivalent to the emission reduction of more than 3400 mu of forest in one year. The report also compares the lifetime fuel consumption and greenhouse gas emissions of electric vehicles and traditional fuel vehicles, and the carbon reduction effect of pure electric vehicles is dominant as a whole.

Obviously, musk wants to describe a story of new energy vehicles replacing fuel vehicles and clean energy replacing fossil energy, although it will take some time to completely replace it.

This conflicts with the comprehensive logic of ESG rating

In the first quarter of 2022, the global sales of new energy vehicles totaled 2.004 million, with an annual growth rate of 80%. New energy vehicles have become a symbol of low-carbon and environmental protection in the eyes of consumers. Is the ESG rating of new energy vehicle companies necessarily high? This is not the case.

Take MSCI rating as an example. Like Tesla, BYD, a domestic new energy vehicle enterprise, is rated a (i.e. average level). From the issues contained in the ESG framework, such rating results have their roots and are also the real object of Musk's attack: the ESG evaluation model system.

At present, mainstream ESG rating agencies including MSCI, FTSE Russell and S & P usually adopt the indicator weight method, that is, they subdivide several secondary and tertiary indicators for the three primary indicators under the framework of environment (E), society (s) and corporate governance (g). The institution assigns a value to the index according to a certain scoring method, and then calculates a score in combination with the index weight, corresponding to the corresponding rating.

According to the report released by MSCI, new energy vehicles, like fuel vehicles, still belong to the automobile (i.e. "automobile") industry. For this industry, MSCI ratings mainly focus on the following key issues: environmental aspects, focusing on product carbon footprint, opportunities in clean technology, hazardous emissions and waste; At the social level, pay attention to product safety and quality, labor management and chemical safety; Corporate governance, mainly including ownership, employee compensation, business ethics, etc.

In other words, Tesla's score is the result of comprehensive consideration of dozens of sub topics under the above framework. Because the subdivision indicators are huge, the weight allocated to each indicator is very small. Therefore, even if Tesla performs well in carbon emission indicators, but other indicators are not outstanding, the overall rating results will be average.

MSCI rated Tesla as "average". Figure /msci official website

From a social perspective, Tesla has been criticized by consumers in terms of product safety and quality. In recent years, for Tesla's "brake failure", there has been more than one rights protection storm. Employees of Tesla's California plant have also sued Tesla for "racial discrimination".

These events are factors that can affect ESG rating results. If rating is regarded as an exam, it is obvious that Tesla is "lagging behind" in some subjects.

"Scores of sub indicators under the ESG framework are scoring points, which doesn't mean that good carbon reduction can get high scores." Sun Xi said.

In his opinion, the college entrance examination may not be perfect, but it will not work without this selection mechanism. "If you test ordinary people by testing special students, it will cause greater problems."

Attacking ESG is meaningless

If we want to thoroughly understand the root causes of ESG comprehensive evaluation, we need to return to the starting point of responsible investment.

ESG was born out of ethical investment and social value investment. Its birth is to provide investors with a set of indicators to measure the sustainability of enterprises in addition to financial indicators. This starting point determines that ESG needs to put all enterprises on the same level for a relatively fair investigation, rather than a customized measurement of a certain enterprise.

"Many international evaluation institutions, including MSCI, are pursuing global comparability." Hanxiaoyan, head of ESG Research Department of Harvest Fund, was responsible for ESG rating research in MSCI China. She said that the key point of the rating system is that it can cover most markets.

In fact, this is also the expectation of many people in the industry. "Business for the good" is not an empty slogan. To implement it, performance is still needed. The role of ESG is to enable investors to clearly see the development quality of a company.

Sun Xi said that if we use the thinking of "specialty students" to evaluate, this is an environmental specialty student, and that is a social specialty student, which can only cause chaos to the investment market.

This is also one of the logic of ESG evolution: continuously introducing rating indicators with wider coverage and more perfect standards. The more perfect the standard is, the more it can cover most enterprises. Even Tesla, who criticizes ESG in a high profile, cannot be divorced.

Tesla's influence report this year analyzed the company's influence from five aspects: corporate governance, corporate culture, environmental impact, product impact and supply chain. It can be seen that the contents of the report are still within the scope of environmental, social and corporate governance issues.

From this perspective, ESG is only a set of methodology and has no position.

"So musk said that ESG is the devil, which is a wrong statement." Sun Xi said that attacking ESG itself is meaningless.

ESG is still playing a global game

Compared with the objectivity of ESG, ESG rating agencies are more subjective.

In fact, the rating methods of several ESG rating agencies in the current market are different. Even for a company, the results obtained at different rating agencies may be different. Behind these differences is the different understanding of ESG by institutions and the result of continuous game in the global capital market.

"In China, the current ESG definition standards of various regulatory agencies are also inconsistent or have not been clearly defined." maxianfeng, vice president of China Securities Regulatory Institute of finance, CSRC, once said that this makes China's ESG investment products have "green" operation space, which may lead to ESG investment decision-making mistakes, and make the investment purpose and investment risk mismatched, forming a dilemma.

In view of this situation, the industry has also put forward corresponding ideas.

Maweihua, member of the influence Steering Committee of the sustainable development goals of the United Nations Development Programme, former president of China Merchants Bank and chairman of menglang sustainable digital technology, once proposed to launch the comprehensive value measurement table of the enterprise in addition to the traditional three financial statements, income statement, balance sheet and cash flow statement, so as to evaluate the environmental value and social value of the enterprise.

Sun Xi proposed from the perspective of the "5p" model that the more detailed the evaluation of individual indicators, the more reasonable and scientific the rating will be. "If each indicator is subdivided and measured from the five aspects of rules and regulations, management systems, implementation projects, performance data, news and public opinion, the quantification of the entire evaluation system will be more reasonable."

Back to the focus of public opinion this time, although Musk's query "chose the wrong object", it still shows that ESG rating is not perfect to some extent. Of course, this is not a total negation of ESG. After all, as an internationally recognized concept of sustainable development, ESG is a bridge to enhance the interaction and investment between local listed companies and international investors.

In 2021, about 26% of A-share listed companies issued ESG reports, increasing from 371 in 2009 to 1125 now, with a steady growth rate.

For local ESG institutions and investors, while actively embracing the ESG concept, they can quickly establish an ESG evaluation system that is in line with international standards and suitable for national conditions, so as to better promote the practice of the concept of sustainable development in the Chinese market.

At present, ESG is still on the road. Around this concept, an industry including ESG data, rating, risk control and consulting is in the ascendant. Only when the ecosystem of ESG continues to expand, can we put forward better solutions in the face of questions like Tesla.

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