Who Would Win?
Sustainability Edition
This article is the first in our three-part Sustainability Series, where we will be examining aberrations and inconsistencies in ESG ratings, what it means for a company to be sustainable, and what you, as an individual, can do to lead a sustainable life.
If you’re like us, you’re tired of seeing greenwashing everywhere you look. There’s Big Oil putting out commitments to “net-zero” while continuing to frack and drill, gas-guzzling companies using influencers and social media to portray a “green” brand, and automakers reporting impartial or falsified emission disclosures. And much of this is just to get a score from an unregulated, unstandardised rating system.
To show the absurdity of relying on ESG scoring alone, let’s play a game to guess which company would have a higher ESG score.
As with all games, there are rules to play by. We’re using Refinitiv and Sustainalytics for the ESG scores as they are publicly available. Refinitiv ranks companies from 0-100 into quartiles from worst to best, with 100 being the best ESG score. Sustainalytics ranks companies by risk, where the lowest score (least risk) wins, while scores above 40 denote a “severe risk.”
Ready? Let’s get started.
First Up: Royal Dutch Shell vs. Vestas Wind Systems
Who has the better ESG score here, a crude oil and natural gas energy company or a wind turbine company?
Well, that depends upon who you ask. For Refinitiv, it’s Shell, the 1897 traditional Big Oil company that plans to reduce its oil production by only 1-2% a year by 2030. For Sustainalytics, Vestas is considerably less risky than Shell (as one would expect).
How?
Vestas and Shell are not listed in the same industry by Refinitiv, though both produce energy. Shell sits at the top of the Oil & Gas industry, while Vestas is classified as a Renewable Energy company. Though Refinitiv says relative scoring based on industry materiality reduces bias, it actually obscures the true impact of a company. When the point of ESG scoring is to objectively identify sustainable practices (or lack thereof), standardizing by industry doesn’t make sense when an entire industry like Oil & Gas is unsustainable. It’s like trying to compare apples and oranges when you really only want to know about apples.
Next Up: Tesla vs. Ford Motor Company
On the left, we’ve got Tesla, the “technoking” of EVs. On the right, there’s Ford, the All-American assembly-line classic. Tesla and Ford Motors are leading auto manufacturers in an industry that accounts for 11.9% of global CO2 emissions (road transport).
So who comes first in this race for best ESG rating? Good ole’ Ford Motors.
ESG scoring doesn’t perform so well for the golden boy of electric vehicles. Refinitiv puts Tesla solidly in the Third Quartile (“good ESG performance”), while Sustainalytics classifies Tesla as “High Risk.” Both ratings rank Tesla as less ESG-compliant than Ford Motors.
How?
While Ford is now on the EV bandwagon, it was dragging its feet for quite some time. Tesla pioneered the EV sector, disrupting the traditional auto industry and forcing innovation amongst older players like Ford. However, in the eyes of ESG, Tesla’s disruptive innovation is not considered very sustainable -- why?
The leading EV manufacturer does not report carbon emissions nor does it commit to carbon targets. Ford, on the other hand, discloses all its emissions, including those from the cars they produce and sell. Ford’s emissions may be significantly higher, but it is rewarded for reporting those emissions. Additionally, EVs have a higher environmental impact during manufacturing due to the metals needed to construct batteries (lithium, nickel, cobalt).
Last, but not least: Beyond Meat vs. JBS
Okay, we’ve got a plant-based protein up against the largest meat processing company in the world. Who wins?
So no one really wins this round since neither are in the Fourth Quartile, but JBS (68/100) does come out higher than Beyond Meat (17/100) according to Refinitiv. That’s right, a meat processor scores 4 times higher than pea protein. For Sustainalytics, both companies are in the “Severe Risk” category.
How?
Beyond Meat has a transparency problem. A 2018 S&P Global Market Intelligence report critiqued Beyond Meat for not disclosing environmental impacts. At the time of writing, Beyond Meat has yet to disclose any impact or emission reports. Because of this, Beyond Meat’s weighted environmental disclosure ratio is 0% while Tyson Foods’ is 98% (the second largest meat processor after JBS).
Though Beyond Meat hasn’t disclosed its environmental impact, the company did point to a University of Michigan study that compared the Beyond Burger to a ¼ lb. US beef burger. The study found that a Beyond Burger consumes 99% less water, 93% less land, 46% less energy, and generates 90% fewer GHG Emissions than a typical beef burger. But, according to ESG raters, this study wasn’t enough.
Who won from this exercise? Certainly not the planet. These scores are all over the place -- and we’re only looking at two rating systems (there are 50+ major systems out there, and hundreds more small rating agencies). If anything, this exercise probably confused your understanding of sustainability and what it means for a company to be sustainable. The only thing clear to us is that ESG needs serious standardization and regulation to mature into something that we take seriously.
If we can’t guess the ESG score of the company, is that a lapse of our judgement or the rating systems? Are we blinded by greenwashing? Or are the rating systems the ones blinded by empty statements of carbon neutrality? (Spoiler alert: It’s probably not us)
Moral of the story: Don’t judge a company by its ESG score.