Hello from London, where Simon, myself and our FT colleagues welcomed some of the biggest names in sustainable business and finance to the Moral Money Europe Summit. It was a compelling two days of hugely stimulating conversations on subjects from carbon pricing to greenwashing. We’re already looking forward to the Asia and Americas summits in Singapore and New York later this year — register now to get your early bird discount. We have picked out five highlights to read below from this week’s event that we think will resonate in the coming months.
But first, we delve into the controversy sparked this week by S&P Global’s decision to drop Tesla from its main ESG index — sparking a furious backlash from Elon Musk.
And don’t forget that the World Economic Forum is back next week, with the first Davos gathering for two years. Davos in the spring? Why not? Gillian, Simon and several of our colleagues will be on the ground. We will be publishing daily to keep you updated on the key debates. (Patrick Temple-West)
Tesla out, Exxon in — what’s going on with S&P’s ESG index update?
Updates to stock indices aren’t typically a source of great excitement. The latest “rebalancing” of the S&P 500 ESG index, which has now dropped Tesla as a constituent, was a pretty explosive exception to that rule.
“ESG is a scam,” Tesla chief executive Elon Musk wrote on Twitter. “It has been weaponized by phony social justice warriors.” He went on to claim that S&P Global Ratings had “lost their integrity”, calling the move “a clear case of wacktivism”, and tweeted a meme claiming that ESG scores measure “how compliant your business is with the leftist agenda”.
The update has sparked intense debate about the fitness for purpose of ESG ratings, with Musk far from alone in his criticism of S&P Global. “Ridiculous. Not worthy of any other response,” wrote Cathie Wood, whose Ark Invest has been one of the most high-profile investors in Tesla. So I thought it was worth having a chat with the person who oversaw the index change: Margaret Dorn, S&P Global’s head of ESG indices for North America.
“It was business as usual as far as the rebalance went,” Dorn told Moral Money. “The beauty of an index is that it’s transparent and rules-based, and we followed the rules of the index.”
That defence is not enough to satisfy Musk and others who question how Tesla — with its huge role in the growth of low-carbon transport — could be dropped from this ESG index, while oil giant ExxonMobil remains on the list.
But the S&P 500 ESG index is not designed to focus on companies with the most positive climate impacts, Dorn said, noting that her company offers different indices — notably its “Net Zero 2050 Paris-Aligned” series — for investors who are that way inclined.
This index, she said, was intended to give “broad market exposure”, with “industry group neutrality”, while “increasing the sustainability profile of the index”. Among the eligibility criteria, companies must be ranked in the top 75 per cent of their industry group by S&P’s ESG ratings team. This year, Tesla’s rating fell into the bottom quartile of the automotive sector because of factors that included claims of racial discrimination and poor working conditions at one of its factories.
It was also marked down for its “[lack of] low carbon strategy”. That might seem perverse to many observers, given that the company’s entire business model is centred on low-carbon transportation, especially so given the inclusion of ExxonMobil. How can a fossil fuel behemoth form part of an ESG index?
S&P offers full transparency on the detailed criteria and methodology underlying the index, which reflect heavy consultation with investors, Dorn said. Those conversations have prompted it to exclude several categories of companies from consideration for this index, such as those that earn a large portion of revenue from small arms sales and oil sands development.
But investors, on the whole, have not shown strong support for the idea of excluding the oil and gas industry from consideration altogether, she said. And for those who want a tougher approach to that sector, there is a wide range of other products available from S&P and other index providers. That diversity of options is useful, Dorn argued, just as investors can benefit from speaking to a range of sellside equity analysts. “Having various opinions on how a company performs is nothing new,” she said.
Yet the logic behind ESG index decisions is being interrogated with a fierceness that the likes of S&P Global have not previously encountered. ESG ratings and index providers now find themselves at the centre of a political and cultural battlefield, especially in the US. Expect more fireworks to follow. (Simon Mundy)
Five takeaways from our Europe summit
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Speaker after speaker talked about the urgent need for standardised ESG data, a festering problem in the sustainability market. Andromeda Wood at Workiva warned that without figures on Scope 3 emissions and value chain responsibility it is hard for the financial services sector to scale up their green initiatives. How can green offerings be expanded if banks only have a limited number of “known” green activities and companies, she asked. Determined to organise the often ridiculed “alphabet soup” of ESG data is Emmanuel Faber, head of the International Sustainability Standards Board (ISSB). He emphasised that the ISSB’s role is to “end that soup and create a common language” — and establish a global baseline of standard requirements.
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There were some valuable insights from corporate leaders on the technologies being developed and deployed to tackle the climate crisis, and how demand for them is shaping up. Rolls-Royce chief executive Warren East said that interest in his company’s next-generation nuclear reactors had surged amid the energy market turmoil triggered by the Ukraine conflict. Jan Jenisch of Holcim, the world’s biggest producer of cement — a sector that accounts for about 8 per cent of global emissions — said that the company would be able to capture all carbon emissions from some of its factories within five years. Meanwhile, Miguel Stilwell d’Andrade, chief executive of Portugal-based energy group EDP, warned that policy and regulatory hurdles were holding back the rollout of green technology at the scale required. “In some of the big European countries, projects take maybe six, seven years to be permitted. That’s unacceptable,” he said.
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Speakers voiced concern about the sluggish pace of growth in funding for sustainable development in low-income nations. Mark Napier, chief executive of FSD Africa, a non-profit funded by the UK state, warned that bond investors were increasingly worried about high debt loads carried by many African nations. “I wish I could be a bit more optimistic,” he said. To bring emerging markets along, there needs to be better collaboration, said Kay Hope at Bank of America. Investors and underwriters need to work with development banks. And countries need to demonstrate they are serious about ESG by setting goals. “There needs to be an effort from all sides,” she said.
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As sustainable financing options in emerging markets remain constrained, green debt is surging elsewhere. Despite a punishing first quarter for global markets, green and sustainable bond products have held their own, panellists said. Fabrizio Palmucci, a senior director with the Climate Bonds Initiative, noted the sustainability-linked bond market — which is linked to companies’ overall performance on sustainability targets, rather than specific projects — is a sliver of the $2tn green bond market, and pointed to huge growth potential. But issuers of SLBs would need to take the targets seriously amid tightening scrutiny, he warned. “You need to have a plan, you need to have capex, you need to have resources, and you need to disclose all of that.”
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We rounded off the event with a spirited debate between Gillian Tett and Robert Armstrong on the merits of the ESG investment agenda. That followed some sharply contrasting perspectives among earlier speakers at the summit, which made clear that the debate on the fundamentals of ESG investing remains very live indeed. Sharon Thorne, chair of Deloitte’s global board, warned that the costs of serious action on climate change would be dwarfed by those of inaction. “There are no jobs on a dead planet,” she warned. We heard a starkly different message from Stuart Kirk, head of responsible investment at HSBC Asset Management, who gave a provocative talk arguing that central bankers and others have been overstating the economic risks of climate change. “I feel like it’s getting a little bit out of hand — the constant reminders that we are doomed,” he said. (Patrick Temple-West and Simon Mundy)
Smart read
Marsh McLennan is arranging insurance for a controversial east African oil pipeline, putting the world’s largest broker at the centre of a project that has been shunned by major banks and prompted a backlash from its own staff. Our colleagues Leslie Hook and Ian Smith reported how the $5bn pipeline “is fast becoming a litmus test for how willing banks and insurers are to work on environmentally contentious projects”.