ESG
mining and refining processes, create a lot of greenhouse gas emissions, especially in regions with less strict environmental policies.
Many aspects of ESG are also difficult to measure as they are subjective, most notably the social and governance aspects of ESG. For this reason, Tesla, an electric vehicle manufacturer, scores lower than Shell, a petrochemical and energy company. Lora Kolodny states that Tesla’s ‘ codes of business conduct, along with racism and poor working conditions reported at Tesla’s factory in Fremont, California, affected the score ’ (Kolodny, 2022). It is because of such examples that companies may focus on different social aspects. For instance, one company might focus on improving labour practices, whereas another might focus on engaging communities. This can lead to inconsistencies and can cause uneven progress towards sustainable development. Having good governance is difficult to measure and is subjective: in some regions of the world there may be different standards which may not benefit global sustainability goals. ESG ratings do not evaluate the context in which a company is currently operating as it only provides a one-dimensional view of its environmental, social and governance outcomes. For example, an energy firm may be transitioning towards greener practices and methods, away from fossil fuels. However, it may not have perfect data to support this process, despite still making positive changes. Its ESG ratings may appear to be misleading as they don’t encompass the full picture. To conclude, ESG, supported by new regulations such as the corporate sustainability reporting directive (CSRD), help with problems to do with transparency, engagement and standardization. However, despite this, it is not a foolproof framework, as flaws in data presentation and the broad umbrella ESG covers under ‘ social ’ and ‘ governance ’ may provide lower ESG ratings than expected. These inaccuracies in turn can mislead investors and create a misallocation of resources, limiting the rate of sustainable development. Therefore, ESG is not perfect in providing the right outcomes for sustainable development but is a step in the right direction in creating a greener society. Large corporations such as Alphabet (and Intel) have demonstrated the effectiveness of incorporating ESG into their business models and it has thus become clear that ESG can go some way in fostering sustainable development for the future.
Bibliography
Buchholz, L. ‘Top 10: ESG Strategies from Worlds Largest Companies’ , Sustainability Magazine , July 7, 2022, https://sustainabilitymag.com/top10/top-10. [Date accessed: 01/09/24] Kulik, R. ‘ Sustainable development ’ , Encyclopaedia Britannica , July 30, 2024. https://www.britannica.com/topic/sustainable-development. [Date accessed: 31/08/24] Kolodny, L. ‘ Why Tesla was kicked out of the S&P 500 ′ s ESG index ’ , CNBC, May 18 2022. https://www.cnbc.com/2022/05/18/why-tesla-was-kicked-out-of-the-sp-500s-esg-index.html [Date accessed: 20/08/24] Smith, K. A. ‘ Greenwashing and ESG : what you need to know’ , Forbes Advisor , August 25, 2022, https://www.forbes.com/advisor/investing/greenwashing- esg/#:~:text=ESG%20depends%20upon%20third-party%20rating%20organizations. [Date accessed: 22/08/24]
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