A new report revealed companies that boast high environmental, social, and governance (ESG) scores pollute as much or more than their lower-ranked counterparts. 

The Financial Times highlighted these interesting findings from index provider Scientific Beta. The firm found deficiencies in highly-rated companies when measuring their carbon intensity—or “carbon emissions per unit of revenue or market capitalization”—against their environmental (E) rating.

The study found that, for example, a 92% reduction in carbon intensity investors gain “is lost when ESG scores are added as a partial weight determinant.”

Scientific Beta assessed 25 ESG scores from Moody’s, MSCI, and Refinitiv and determined that solely grading a company on its environmental score 

“leads to a substantial deterioration in green performance.” Their results also suggested lumping social (S) and governance (G) scores with carbon intensity results in low-performing green portfolios since ESG scores and carbon intensity, in their view, are “unrelated.”

“ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings,” said Felix Goltz, Scientific Beta research director. “It doesn’t seem that people have actually looked at [the correlations]. They are surprisingly low.”  

Goltz added, “The carbon intensity reduction of green [i.e. low carbon intensity] portfolios can be effectively canceled out by adding ESG objectives.”

A high “E” score, unsurprisingly, doesn’t accurately represent a company’s environmental record. In fact, the high score often obfuscates reality. 

Not only do corporations pay upwards of $500,000 to attain “perfect” or “near perfect” ESG—or even just E—scores, countries boasting high E scores suffer from internal strife economically and environmentally.

Here at IWF, I’ve highlighted the Ghana case study and how high E scores have precipitated the country’s near collapse: 

The African nation of Ghana should first be examined. It currently scores a 97.7 out of 100 on the ESG Index. The Ghanaian government was the first in the continent to raise $5 billion from international capital through Green, Social and Sustainability (GSS) Bonds. GSS bonds fund projects with supposed environmental and social outcomes. In May 2022, the World Bank called GSS bonds a ‘new frontier for Africa that will help the continent build a deeper, resilient, and sustainable financing, according to policymakers, regulators, and peer sovereign issuers from across West Africa.’

But instead of the promised ‘new frontier,’ Ghana experienced high consumer inflation and higher cost of living which prompted protests in the capital, Accra. Earlier this year, Moody’s warned global sustainable bond issuance would be ‘flat’ in response to Russia’s invasion of Ukraine—which is down 28% from Q1 2021. The Ghanaian government didn’t do itself any favors after imposing a tax on electronic payments at the same time. Now the nation, on the brink of economic collapse, is in talks with the International Monetary Fund (IMF) for a bailout.

ESG—particularly when manifested through net-zero, decarbonization policies—fuels green inflation woes and doesn’t improve a company’s environmental standing. 

As Barron’s noted, ESG is doomed to become “marketing slogan” that’s “destined to confuse, or be labeled ‘greenwashing.’”

To learn more about ESG, go HERE.