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  • Doug Chia


Here we go again. Another eye-rolling, forehead-smacking, OMG moment on a Monday morning in Corporate Governance Land. Check out the article in today's WSJ, "ESG Funds Enjoy Record Inflows, Still Back Big Oil and Gas -- Despite claims to consider environmental sustainability, ESG funds invest in Exxon and Occidental Petroleum."

I'm not pro or anti Big Oil, but I would think an ESG fund would not include those stocks, and I'm sure a lot of the retail buyers of these funds would just assume fossil fuel companies are automatically excluded along with tobacco and fire arms companies. If the ESG label is on a fund, retail investors are probably unlikely to examine the holdings. This raises the question of what is the methodology of ESG fund managers and the firms in the ESG industry that give companies ESG ratings. Some of the ESG funds are just index funds that use ratings published by "Big ESG."

Big ESG gets its data from companies by asking them to fill out their surveys or be excluded from their lists. I used to be part of the corporate internal working groups that spent many hours providing information to these ratings firms to get into indexes like FTSE4Good. Eventually, I started recommending that we stop burning so much energy doing this and just tell our story in our own disclosures since we had a good story to tell and people could judge for themselves. Why should we do all this work for free to give someone else data to sell? If we fall out of their index, big deal. It won't be the end of the world.

So, what is Big ESG's methodology? This is going to make some people mad, but I tell corporates that we are still at the point where companies get credit for the volume of disclosure and not necessarily the substance of those disclosures. Just the mere fact that you disclose anything still goes a long way. And of course there are consultants whom you can hire to coach you how to fill out the surveys to get good scores. Any company in any industry can figure out how to take the test and get a higher score than before without telling any untruths.

If you want an in-depth look at the soft underbelly of ESG funds, take a look at a great article, "Buyer Beware: The Paradox of ESG & Passive ESG Funds," by Dana Brakman Reiser at Brooklyn Law School and Anne M. Tucker at Georgia State University College of Law. Its very readable and very revealing.

1 comment

1 Comment

Nov 18, 2019

I think it is fine that ESG funds include oil companies. They just need to be very explicit about how that fits into their ESG framework. Are they investing in "best in class" oil companies that are leading the transition to clean energy? Do they remain invested to a small degree in order to engage oil companies? 

What I find most problematic is ESG funds that vote against widely accepted ESG proposals. See Morningstar Direct Uncovers ESG Hypocrites at and Gender-Diversity: Who Votes Fearlessly? at


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