Time to break up the ESG gang, for the good of investors

The blending of E, S and G criteria has had the perverse effect of diluting ESG ratings.

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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)

CHAPEL HILL, N.C. (Callaway Climate Insights) — It’s time for the E to go its own way, apart from S and G.

That’s not because the Social and Governance criteria that make up ESG ratings aren’t important. But they focus on distinctly different virtues than Environmental sustainability. Melding all three categories together has led to the dilution of each, with the result that the total has become much less than the sum of the parts.

Consider the widely diverse criteria that go into ESG rating schemes. The Social category includes factors as varied as employment practices, safety standards, talent development and product liability. The Governance category includes criteria such as the composition of the board of directors, CEO pay practices, tax shielding, accounting quality, and corruption. A company can be a major offender when it comes to greenhouse gas emissions but still have a high rating in the Social and Governance categories. Such a company’s overall ESG rating might very well be no worse than average — and maybe even above.

What would such a rating tell us? It would be reminiscent of the man whose head is in the oven and feet in the freezer but who, on average, feels just fine.