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Environmental, social and governance ratings, coupled with the Biden administration’s subsidization of electric vehicles, are facilitating the misallocation of capital toward firms controlled by the Chinese Communist Party. ESG ratings are encouraging the politicization of retirees’ life savings and bolstering China’s stranglehold on the global energy sector.
There is no universal agreement on how to define ESG. The European energy market is an example of its fickle nature. According to Bloomberg, “European-based ESG equity funds have been increasing their investments in firms like Shell Plc and Repsol SA since Russia’s invasion of Ukraine upended the energy markets.” ESG’s traditional exclusion of carbon-intensive companies suddenly shifted in order to ameliorate the supply crunch on oil and gas.
ESG ratings agencies such as S&P Global, Sustainalytics and MSCI evaluate companies’ ESG scores differently. Human biases and artificial intelligence biases have contributed to “divergence” in rating methodologies. Sustainalytics and MSCI “often disagree” on the degree to which a company is environmentally conscious. The ratings are subjective, immaterial and lack concrete indicators that outline the true financial performance of a company.
Sen. Pat Toomey (R-Pa.) sent letters asking for more information from the agencies on how they calculate their ESG ratings. The letters state that “many ESG ratings firms consider information that is not material or financially relevant under federal securities laws.”
Some academics have echoed Toomey’s inquiries by calling for ratings agencies to be more transparent. One article from the “Review of Finance 2022,” concludes that “rating agencies should become much more transparent with regard to their measurement practices and methodologies.
