ESG rating tool needs urgent fixing for it to make sense impactful

Someone posed the question: why is it that Tesla has a bad environmental, social and governance (ESG) score? Just out of curiosity, I looked up its ESG ratings and compared it to other leading automobile companies.

Tesla had a 28.5 ESG score while Mercedes-Benz Group (20.9), Ford (22.3) and General Motors (28.5) all ranked higher according to Morningstar as of March 2023 — a lower score is better. 

In my mind, I think this is not right. Then the BBC “sex for work” expose happened. I quickly checked Unilever and Sainsbury ESG ratings; Unilever is rated at 24.4 with “medium risk” and Sainbury at 17.1 with “low risk”.

In my mind, I think again that something is clearly wrong. And then I recalled a little over two months ago, one of the world’s biggest investment firms, Vanguard, pulled out of a major investment industry initiative on tackling climate change stating that “it was not in the game of politics”. 

All this got me thinking; are ESG ratings superficial (and the movement by extension)?

Let me start from here: I think I understand Vanguard. That whole “let's go green” campaign has lost its way. Politics seems to have taken over while companies are busy “greenwashing” their credentials.

Note: greenwashing is when companies spend more time and money on marketing and public relations than on minimising the impact of their operations on the environment. Too many glossy reports and not enough truth. It seems ESG disclosures are nothing but “window dressing.” 

Dissimilar standards mean companies are free to state whatever they wish to say. 

Our own Nairobi Securities Exchange-led ESG programme is no exception. It has had little to show for itself since its launch some two years ago. More like groping in the dark. Altogether, ESG has not lived up to its hype. It’s a total mess. 

But do we run away from it? Not at all, we need to fix it. 

First, that whole rating scheme has to be revisited. A more balanced approach is needed. Tesla’s “E” credentials are super great but why is it punished so severely for its low “S” and “G” credentials? 

Secondly, gaining commonality in standards is a must. Lastly, the current ESG mindset needs a reset. Being ESG-compliant simply means that you care and that’s enough.

It does not equal increased profitability. It does not make companies more attractive. 

Any outperformance should be viewed as a gift from heaven. Something else: demonising non-compliant companies does not solve the problem.

Throwing soup at “the Sower” doesn’t do it either. Leadership also means leading from the front, not gulf-streaming into Davos.

Decarbonising won’t be easy. Kicking out the “politicisation” won't be a walk in the park but it is worth a try. In the end, ESG is an important movement. 

There’s only one earth. And good corporate governance is a competitive advantage. Loving your neighbour as you love yourself is more important than an extra penny in your bottom line.

Mwanyasi is MD, Canaan Capital.