Like it or Not, ESG Reporting is Here to Stay

Critics of the corporate social responsibility movement finally had their moment in the sun this week, after the S&P 500 index of companies ranking high on the ESG (environmental, social and governance) scale declined to include the well-known automaker Tesla. That may seem ridiculous, considering that Tesla is a manufacturer of zero-emission cars. However, the S&P decision underscores the importance of viewing ESG reporting through a holistic lens.

The importance of a holistic perspective

In an article for the World Economic Forum published earlier this week, a trio of analysts with the firm KPMG described some of the key issues involved in ESG reporting.

They note that ESG reporting is a relatively new field that is still sorting through transparency issues and grappling with thorny analytical challenges, such as measuring Scope 3 emissions.

In addition, they maintain that ESG investors currently do not have a wide field from which to pick:

“Much of the current crop of ESG/sustainable funds are, arguably, standard trackers minus fossil fuel-heavy companies. True impact investments — which aim to have a positive effect on people and the planet — are thin on the ground, with few options for investing in ‘brown’ businesses transitioning to ‘green.’ Indeed, the business case for impact investments has yet to be clearly established.”

That point about excluding fossil fuel-heavy companies goes to the heart of the Tesla issue. The roots of ESG reporting are partly in the area of sustainability reporting, which does focus heavily on carbon emissions and other forms of pollution. From that perspective, Tesla should be an ESG shoo-in.

However, as demonstrated by the S&P decision, a narrow focus on pollution avoidance does not guarantee a high ESG ranking.

ESG reporting and corporate culture

ESG reporting also represents a step up from the traditional culture of corporate giving, though it does not necessarily conflate corporate culture with executive leadership.

Take the case of the leading global software firm Oracle, which has established a high-ranking ESG reputation. “Oracle’s corporate citizenship efforts are steadfast, clear-eyed, and effective. We’re proud that our greatest assets—our people and our technology—change lives for the better, every day,” the company states.

Oracle also emphasizes its commitment to sustainability, explaining that “at Oracle, we know that sustainability is good business. We continually invest in initiatives that help us run our business more sustainably and develop products and services that help our customers do the same.”

By some ESG metrics, Oracle is doing all the right things. The company performs relatively high on the cumulative ESG rankings published by CSRHub and other organizations. In particular, it earns a high score from the Human Rights Campaign, which ranks workplaces based LGBTQ inclusion.

Editor's note: Be sure to subscribe to our Brands Taking Stands newsletter, which comes out every Wednesday.

On the other down side, earlier this month Bloomberg Law reported that “Oracle Corp. and its senior leaders, including billionaire chairman Larry Ellison, must face class action litigation over claims they misled investors about the financial health of the tech giant’s cloud computing segment.”

“The suit accuses Oracle’s leaders of attributing its cloud sales success to sustainable business practices when in fact it was the result of tactics that produced only short-term revenue boosts,” Mike Leonard of Bloomberg Law explained.

That may dim the picture for some ESG investors, even if the lawsuit does not have an impact the company’s overall financial performance.

In addition, Ellison’s avowedly “libertarian” politics and public support for former U.S. President Donald Trump may have soured some ESG investors on the company prior to the failed insurrection of January 6, 2021. New revelations about Ellison’s role in the events leading up to the insurrection may be the last straw for some, but others will continue to be attracted by the company’s formal ESG metrics.

Commitments, not only ESG reporting, drive action

As illustrated by Oracle, ESG reporting scores do not necessarily reflect the legal, moral or ethical standards of corporate leadership. However, they do raise expectations, as illustrated by Disney, another company that scores relatively high on ESG rankings and those from the Human Rights Campaign.

Despite its high ESG ranking — or perhaps because of it — Disney faced a withering barrage of criticism earlier this year after corporate leadership failed to speak out against Florida’s “Don’t Say Gay” bill. When the company finally responded, state legislators clapped back with new legislation apparently intended to punish Disney while intimidating other corporate leaders into silence.

Instead of backing down, Disney doubled down. Last week the company moved forward with a planned rebrand of its “Rainbow Collection” merchandise as the “Pride Collection,” in time for launch during Pride Month.

Disney could have downplayed the rebrand in order to cultivate a more favorable legislative environment in Florida. Instead, the company chose to follow an in-your-face pathway. The official Pride Collection website displays large, glowing rainbow lettering to list each of the company’s beloved icons of pop culture, with “Pixar Pride,” “Marvel Pride,” and “Star Wars Pride” included alongside “Disney Pride.”

In addition, Disney has announced that it will donate all Pride Collection profits during Pride Month to a group of LGBTQIA+ organizations.

“I’m proud to share just a bit about what we are doing for the LGBTQIA+ community and to joyfully celebrate Pride not just for the month of June, but all year-round,” Disney's senior VP of global marketing, Lisa Becket, wrote in a May 16 blog post describing the rebrand. “We’ll also be highlighting inspirational and celebratory stories about our guests, cast and community on the Disney Parks Blog and across our social media channels."

What’s all this about Tesla?

As for Tesla, the raising of expectations has thrust the company into the ESG spotlight. According to S&P, its performance just didn’t match up. In a May 17 blog post explaining the methodology behind the fourth annual rebalancing of the S&P 500 ESG Index, S&P senior director and head of ESG indices for North America, Margaret Dorn, singles out Tesla for particular criticism.

“But, how can a company whose self-declared mission is to ‘accelerate the world’s transition to sustainable energy’ not make the cut in an ESG index?” she asks.

Answering her own question, Dorn takes Tesla to task for not keeping pace with ESG progress among its peers in the auto industry, particularly in the areas of carbon strategy and codes of conduct.

In addition, Dorn cites unresolved racial discrimination issues at the company’s factory Fremont, California, along with issues related to deaths and injuries linked to its autopilot vehicles.

“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens,” she concludes.

Tesla CEO Elon Musk has cried foul over the exclusion, but Dorn’s critique rings true.

Musk is probably lucky that Dorn declined to pursue the point about accelerating the transition to sustainable energy even farther.

After all, Musk’s own SpaceX venture is awash in greenhouse gas emissions and environmental impacts related to its test site in Texas. In that context, Tesla is not the planet-saving hero it is made out to be. It is just another carbon offset in a world that urgently needs action, not empty promises. 

Image credit: Blomst via Pixabay