Where there is complexity there is controversy

When Tesla, champion of the green energy movement, was kicked out of S&P’s ESG index, CEO Elon Musk was incensed. He tweeted: “ESG is a scam. It has been weaponised by phony social justice warriors”.

Environmental, Social, and Governance or ESG is the abbreviation for corporate contribution to society beyond monetary returns. It encompasses how a company monitors its impact on the environment, how it treats its employees and others, and how its business operations are managed. Companies also have programmes relating to Corporate Social Responsibility (CSR), a concept similar to ESG. Both are broadly about the good a company does. But ESG is more data-driven, measured, and rated. Investment companies and rating agencies have turned ESG into a science. International bodies issue ESG guidelines and regulators eye another area for corporate compliance. What makes one firm good depends on a complex set of factors as determined by the ratings agencies and guidelines and disclosure requirements set by international bodies.

In the case of Tesla, while the company is clearly a pioneer, pushing the auto industry from burning fossil fuels to using renewables, it did not do well on other factors such as its staff’s working conditions, the management of its supply chain, even the way it uses water, and the attention it pays to the investigation of crashes of its cars especially those of the experimental autonomous variety. All these factors are taken into account and quantitatively bundled into ESG measures for benchmarking. There’s a good deal of complexity built into ESG ratings.

Where there is complexity there is always someone who is aiming to game the system or overstate and exaggerate their company’s ESG activities in what is called “greenwashing.” John Gapper of the Financial Times writes that “Greenwashing is tempting for CEOs who tell stories”.

Earlier this year, an executive who had been sacked by a major German investment house, claimed that she lost her job because she called out her employer for misrepresenting its ESG credentials in the company’s annual report. After initially issuing denials, the investment firm’s CEO ultimately resigned.

There is a danger that ESG measures have become too complex to cope with the complexities of every business. These spew out composite ESG scores that are too opaque to be of any good to anyone except ESG experts.

Better to light a candle than curse the darkness

The world of fintech is conscious of its role in “doing good” regardless of compliance or scoring methodologies. These companies are making things better and improving the lives of ordinary people in many ways that are anything but opaque. These are not phony justice warriors but are agents of “good” change and it is not difficult to understand how they are going about it.

Take, for example, a start-up called Green Vision. It issues payment cards made of wood not polluting plastic and it promises to plant a tree out of its own profit margins for every $50 a customer spends.

Another environmental start-up is an investment platform called Trine which boldly displays on its website: “For people, for planet, for profit” – a slogan which in itself may be a better representation of what ESG stands for in the corporate world. Anyone can lend money to environmental initiatives that are raising money on the platform and can decide from as low as “€25 minimum to whatever is left to fully fund the loan.” When the borrower is ready to generate cash flows they pay back the loan along with interest.

Fintech initiatives are also about making an impact from a social perspective. SilverBills and Eversafe do not offer any revolutionary financial management ideas but cater to those who may be unable to fully manage their financial situation. They provide financial tools that operate as a “second set of eyes” for elderly or dependent individuals or their caregivers helping them track their savings and financial activities guarding against mistakes and more importantly, the growing menace of scammers.

Finally, there are those who are neither start-ups nor do they fall squarely within the definition of a fintech. Some of them have been around for years if not decades. They enable buyers and businesses to use digital tools and technologies to make payments, accept payments, and access loans and working capital.  They are changing lives and creating opportunities for many. They may not rank high on the composite ESG scale but they have made their own contributions including those who had previously been financially excluded from the benefits of the advances in modern financial networks and bringing them into the “formal” economy where they contribute to their own development and to that of others.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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