What or who determines if a company is socially responsible? Increasingly, that determination is being made by a minority in some of the largest money managers in the U.S. through what is known as the ESG Index. ESG stands for Environmental, Social, and Governance.
There’s a growing trend among companies to apply those three non-financial factors in identifying material risks and growth opportunities. Though ESG metrics are usually not mandatory as part of financial reports, companies are often making disclosures about ESG in their annual report or in a standalone sustainability report.
Interest from millennial investors around the world has driven a rapid rise in ESG investment. A 2018 survey by Bank of America and Merrill Lynch found that there may be trillions of dollars of assets growth in ESG funds over the next 20 years.
Guy Williams, CEO of Gulf Coast Bank and Trust, appeared on the Newell Normand Show this week and sounding the alarm about the potential dangers in placing too much emphasis on ESG. Williams says ESG may be sound good on paper, but it’s problematic in application when the biggest money management firms like BlackRock, Vanguard and State Street are determining which companies are socially responsible.
“You would think that’s nice, everyone wants a clean environment. Everyone wants nice social justice, and everyone would like good government. The problem is, we’ve essentially delegated to three people,” Williams told Normand on Thursday.
Williams said there is very little preventing influential financial and political players from inserting personal and political bias in the determination of which companies are sound under the ESG model. Back in the spring, Tesla was kicked out of the S&P 500 ESG Index over issues including claims of racial discrimination and a lack of published information about its low carbon strategy. Williams said there are plenty of examples of ESG going sideways. Williams put a finer point on Tesla being booted from the ESG index because of political leanings by executives like Larry Fink of BlackRock.
“One, Tesla. Biggest producer of electric cars by far. They’ve made the electrical car practical. They’ve sold them all over the world. They were dropped from the ESG index because Larry Think doesn’t like Elon Musk politics. So, in his theory the governance is bad. Elon Musk has too much power. Well, if you’re an ESG investor this is good for the environment if you like electric cars, how can you drop it just because of a political dispute with Elon Musk? And this is what becomes a real problem because you’re looking at opinions on any one of these three issues and they’re influencing boardroom actions,” said Williams.
Listen to more William’s take on ESG and its negative impact:
