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ESG’s reputation hit!


Aren’t electric vehicles good for the planet? Of course, it doesn’t even compare to fossil fuel-powered vehicles. So, shouldn’t the world’s largest electric vehicle manufacturer be at the top of the ESG indices? Answer: Not necessary!

The ESG (Environmental, Social, Governance) phenomenon has recently been like a sharp sword swinging at the top of the corporate world. It is an important bearing that some of the companies follow meticulously and some of them try to find direction by watching with fearful eyes.

But this prestigious phenomenon has been hit by various reasons lately. The passionate association of the corporate world with the ESG seems to have suffered a little in these challenging days that the world is going through.

First, the S&P Dow Jones Index removed Tesla from the ESG version of the S&P 500 Index. The decision came as a surprise. For many, the electric vehicle manufacturer deserved the highest ESG honor.

It wasn’t just the public that was surprised. Elon Musk also reacted sharply to the removal of Tesla from the ESG index, despite “doing more for the environment than any company”, saying it was a “fraud” and that the ESG was “armed by fake social justice warriors”. The first and biggest blow to the ESG concept was thus delivered by the richest person in the world, whose every move is followed.

Then another bombshell was dropped by Stuart Kirk, head of investment at HSBC Asset Management. Kirk said the calls for climate change were exaggerated and the financial community was unduly worried about climate change. HSBC announced that it has suspended his duties, saying that the views of its manager do not reflect those of the company.

But once the genie came out of the lamp. Could the opinions of this important player of the financial world actually be the voice of mind of all silent players in the industry? Doesn’t that indicate a very dangerous situation?

So, what’s the problem? 

While the importance of ESG for human, planet and economy is obvious and real, why has it been tried to be pushed into the background by some circles lately?

I don’t think there is just one reason. A few points need to be addressed:

– State of the world economy: Production and supply chains, which have already been disrupted by the pandemic, this time was deeply shaken by the Russian invasion of Ukraine. Rising energy costs are further fueling the scourge of inflation that dominates the global economy. Broken supply chains and production shortages trigger serious problems with access to essential nutrients.

Today, there are grain-based basic food shortages experienced in different intensities in various geographies of the world. It is clear that these problems await solutions in the short term.

Therefore, the eyes of the world have turned to solving the vital problems of today. An issue such as the climate crisis, which is still advancing with very basic but medium-term targets, may be pushed back a bit on the agenda, although it is not clearly stated.

– The role of investors: High volatility in the economy pushes investors to take different positions. The effort to protect the value of money leads to the preference of more traditional financial elements over ESG-oriented investments.

Investing especially in rising energy stocks during this period is considered a smart financial move even for BlackRock, the biggest spokesperson of ESG investments.

– ESG uncertainty: There is a huge disconnect between the perception of the ESG and what it actually is. An important reason for this is the ‘green washing’ activities carried out in many sectors. Especially in the corporate world, the ‘greenwashing marketing’ made to the public has increased the confusion. Concepts were defined incorrectly through dishonest, bad examples.

S&P explained that behind removing Tesla from the ESG listing was “a decline in benchmark-level scores on Tesla’s low carbon strategy (lack of) and business code of conduct” and said it “identified two separate events centered around the allegations”. He announced these as racial discrimination and poor working conditions at Tesla’s Fremont plant, as well as multiple deaths and injuries linked to autopilot vehicles in an investigation.

In other words, although you are making a human/planet-sensitive (at least harmless) product, the way and methods you follow while doing this may prevent you from being an ESG-oriented company.

This is not the one-dimensional ESG; reveals that it is a multidimensional, complex and difficult to measure phenomenon as of today.

ESG is not easy to define (and measure)!

Perhaps the easiest leg of ESG is ‘governance’. It is about the organization’s strategy, accountability and regulatory compliance. The idea that companies with strong corporate governance and well-managed by global standards tend to outperform in the long run is neither controversial nor difficult to measure.

The ‘social’ component is perhaps the most difficult to measure. Its scope is very wide. A multi-layered ecosystem management such as working conditions, employee rights and diversity, relations with all stakeholders. The most critical issue is the difficulty of measuring the net and precise financial effects of this ecosystem management.

Finally, ‘environmental’ is also relatively easy to understand. It involves assessing the environmental impact of a company’s actions. In practice, however, due to the lack of data, it is also very difficult to measure this accurately today. Today, the corporate world seeks methods for measuring and managing the medium and long-term financial impacts of environmental impacts. Because, in the long run, this is the area that has the most material and wider economic impact.

It’s time to hug the ESG, not attack it!

Now, for all the reasons we have listed above, is the time to not move away from ESG, but to embrace it even more.

In today’s world, where globalization is seriously damaged and different ‘sharing’ models (onshoring, friendshoring, etc.) are being discussed even for countries, it is critical to secure reliable food and fuel supplies and protect basic living conditions.

Preventing wars and violence in order to enrich agricultural lands, promote healthy production, protect fundamental rights to life; to ensure human rights, justice and gender equality, it should be the aim of all countries, institutions and humanity to embrace and protect it more than ever, let alone throwing the ESG phenomenon into the background.

It should be kept in mind that the pursuit of dressing solutions for today’s problems will then lead to incurable acute conditions.


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