Fixing the Flaws of Current ESG (Environment, Social, Governance) Measures. An Approach to Setting New Standards

Academic Paper, 2019
28 Pages, Grade: 1,8


Table of Contents

Table of Figures

Table of Abbreviations

1. Introduction

2. Shades of Green

3. Green Investment Indices – What is Green and What Not?

4. Analysis and Evaluation of the MSCI ESG Ratings

5. An Approach to a More Complete Methodology

6. Outlook and Policy Advice

7. Conclusion



List of Tables

Table 1: ESG Scores of DJSI Industry Leaders

Table 2: ESG Scores of FTSE4Good Indices Industry Leaders

Table 2: MSCI ESG Key Issues

Table of Abbreviations

CDP = Carbon Disclosure Project

CEO = Chief Executive Officer

EPA = Environmental Protection Agency

ESG = Environment, Social, Governance

NGO = Non-governmental Organisation

WHO = World Health Organisation

1. Introduction

International experts agree that it is impossible to reach a 1.5-degree scenario without green finance (Tsitsiragos 2016, Thomä 2019). Apart from climate relevance, it is financially relevant for investors because the majority of research indicates that there is a positive relation between environmental, social and governance (ESG) and corporate financial performance (Friede et al. 2015; Romero et al. 2018, 41-42). Furthermore, investors around the globe fear stranded assets because of climate-change risks: 1.8% of global financial assets are considered as ‘climate value at risk’ along a business-as-usual emissions path. This is an estimated amount of USD 2.5 trillion (Dietz et al. 2016, 1). These reasons illustrate why the interest of investors in sustainable investments grew substantially in recent years: global sustainably managed assets under management have increased by 25% from 2014 to 2016 (Green Finance Initiative 2018, 11). Annual global investment in green energy grew from $88bn in 2005 to $332.1bn in 2017 (BloombergNEF 2019, 35). Larry Fink1 calls companies to address social and environmental issues more in his annual letter (2019). The increasing greenwashing and jungle of different standards and labels, as well as intransparency leads to confusion for investors (Watson 2016; Zadeh and Zerafeim 2018, 1; Knight 2019).

Providing society with misleading information about corporate sustainability can affect the social legitimacy and trust of both companies and ESG rating agencies (Olmedo at al. 2019). Therefore, it is crucial to ensure that investments which are labelled as socially or ecologically responsible, are in fact socially or ecologically responsible. Without this legitimacy and trust, decreasing interest in these investments could have bad social and ecological global effects. Therefore, this essay dismantles the weak spots of current “green” metrics and indices to create a foundation for better, more transparent measurements and indices. The research question is: what are the current deficiencies of common metrics and indices and how can one improve them?

To answer this, I will first introduce different definitions of “green” investments and then scrutinise if the companies listed in the Dow Jones Sustainability Index and in the FTSE4Good Index are as green as they claim to be. Then, the MSCI ESG Ratings will be critically analysed and evaluated.

On the basis of these findings I will present my own approach of measurement and indices, before providing an outlook and policy advice, focusing on ecological and climate aspects, rather than social and governance ones.

2. Shades of Green

The lack of consistent standards is reflected in the various definitions of what green or ecological investing actually is. Eyraud et al. (2011, 5) refer to green investment as ‘the investment necessary to reduce greenhouse gas and air pollutant emissions, without significantly reducing the production and consumption of non-energy goods’. Accordingly, green investments incorporate three main components: low-emission energy supply (including nuclear energy), energy efficiency (in energy supply and energy-consuming sectors) and carbon capture and sequestration (including agriculture and deforestation). Investopedia2 (2019), one of the most clicked finance webpages (Alexa 2019), offers that: ‘green investments are essentially investment activities that focus on companies or projects that are committed to the conservation of natural resources, the production and discovery of alternative energy sources, the implementation of clean air and water projects, and/or other environmentally conscious business practices’. This last clause calls into question the suitability of Eyraud et al’s inclusion of nuclear energy. To further exemplify the vagueness of the term ‘green’, Eyraud’s et al. (2011) definition does not mention water pollution, although it is specified in Investopedia’s.

3. Green Investment Indices – What is Green and What Not?

This opaqueness leads to different standards in popular green investment indices, which will be demonstrated by critically analysing the Dow Jones Sustainability Indices (DJSI) and the FTSE4Good Indices (FTSE4GI). The DJSI World applies a rules-based component selection process based on the companies’ Total Sustainability Scores resulting from the annual RobecoSAM Corporate Sustainability Assessment (CSA). By applying a best-in-class method, only the top ranked companies within each industry are selected. No industries are excluded. RobecoSAM considers inter alia corporate governance (including shareholder rights and owenserhip sctructures), tax strategy (including the effective tax rate) and the climate strategy (including scope 1,2 and 3 emssions3) compares companies across 60 industries via questionnaires assessing a mix of 80-100 cross-industry and industry-specific questions. Based on their performance, firms receive scores ranging from 0 to 100 and percentile rankings for approximately 20 financially relevant sustainability criteria across economic, environmental and social dimensions (Robeco SAM 2018).

The Swiss bank UBS was labelled by RobecoSam as industry leader in the category “Diversified Financial Services and Capital Markets” in 2018 and is listed in the DJSI. Although UBS gets an “A” (best mark) from the NGO “Carbon Disclosure Project”4 (CDP) concerning its carbon footprint (category climate change), the company is also criticised (CDP 2019). Apart from the fact that UBS has to pay 3.2bn £ for “systemic tax-evading” in 2019 (BBC 2019), it has been accused for undermining the Paris Agreement by environmental campaign groups because it is among nine western banks which increased their financing of coal plant developers in 2016 (Marriage 2017). UBS provided 26 billion USD in financing for exploration and production of fossil fuels from 2016 through 2018 (finews 2019).

Siemens was also branded an industry leader, and received an A from CDP in the category climate change, although it only got a B- regarding use of water. The subsidiary Siemens Gamesa Renewable Energy SA, only got a C for its carbon emissions. To understand this contradiction, it is important to know that CDP considers scope 1 and scope 2 emissions. (Greenhouse Gas Protocol 2019). Furthermore, Olmedo et al. (2019, 13) criticise that the ESG agency RobecoSAM completely lack “life-cycle thinking” and “balance” in their approach. According to them, life-cycle thinking includes considering economic, social and environmental responsibilities in upstream and downstream activities. Sustainability is multi-dimensional and consists of financial, economic, environmental and social elements. The authors understand balance as not prioritising or undermining one of these elements (Ibid., 8).

The following figure illustrates the ESG scores of a sample of 20 randomly picked industry leaders in the DJSI. Next to the CDP scores, I included the score of Sustainalytics and added the column “Forbes Top 100” which indicates if the company is ranked among the 100 most sustainable companies in 2019. Thereby, Forbes is inter alia considering energy productivity5, greenhouse gas productivity6 and water productivity7 (Corporate Knights 2019, 7).

Furthermore, the table contains a climate policy footprint and misalignment score of the NGO Influence Map. The climate policy footprint8 measures the relative impact of a company on climate policy globally. The climate policy footprint score ranges from -100 (worst impact) to +100 (best impact.). The misalignment score represents the contrast between a company's stated positions on climate change policy and its actual impact on policy through its trade associations. Here, the larger the score, the greater the contrast (Influence Map 2019). I highlighted very good scores in green and very bad ones in red. F means a failure to provide sufficient information to CDP to be evaluated (CDP 2019).

Table 1 shows the massive lack of data. Although the majority of the companies in the sample have scores between neutral and good, it remains unclear if companies like ASE Technology or Grupo Argos are in fact environmental polluter. Only 2 of the companies in the sample are listed in the Forbes 100 most sustainable companies which is representative for the different methodologies which are applied.

Table 3: ESG Scores of DJSI Industry Leaders

Abbildung in dieser Leseprobe nicht enthalten

Sources: RobecoSAM 2018, CDP 2019, Forbes 2019, Influence Map 2018, Yahoo Finance 2019.

FTSE Russell considers over 300 individual ESG indicators, focusing on issues such as tax transparency, corruption, labour standards, human rights, climate change, biodiversity, water security and pollution (FTSE Russell 2019).

Olmedo et al. (2019, 13) criticise that life-cycle thinking and an intergenerational perspective are not considered. They believe an intergenerational perspective means considering the long-term effects of today’s decisions and balance short-term and long-term ones, thus future and current needs must be identified, evaluated and managed (Ibid., 8).


Excerpt out of 28 pages


Fixing the Flaws of Current ESG (Environment, Social, Governance) Measures. An Approach to Setting New Standards
School of Oriental and African Studies, University of London  (SOAS)
ESG Investing
Catalog Number
ISBN (eBook)
ISBN (Book)
Ethisch, Investieren, Invest, ESG, klimawandel, Climate Change, Green, finance
Quote paper
David Höhl (Author), 2019, Fixing the Flaws of Current ESG (Environment, Social, Governance) Measures. An Approach to Setting New Standards, Munich, GRIN Verlag,


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