{"id":27458,"date":"2025-01-15T01:27:30","date_gmt":"2025-01-15T01:27:30","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/03-17-22-new-the-false-promise-of-esg-lev-end-of-accounting-blog\/"},"modified":"2025-01-15T01:27:30","modified_gmt":"2025-01-15T01:27:30","slug":"03-17-22-new-the-false-promise-of-esg-lev-end-of-accounting-blog","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=27458","title":{"rendered":"[03\/17\/22 NEW]\u00a0The False Promise of ESG \u2013 Lev End Of Accounting Blog"},"content":{"rendered":"
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By Elizabeth Demers, Jurian Hendrikse, Philip Joos, and Baruch Lev<\/em><\/p>\n
Millions of investors and countless fund managers direct their investments to companies that are highly-rated on the basis of their environmental, social, and governance (\u201cESG\u201d) activities in an attempt to do good. The claim by ESG advocates, pundits, and many academics that highly-rated ESG companies and funds also deliver superior returns bolsters this move: Doing better by doing good. The best of all worlds.<\/p>\n
But do ESG ratings really deliver on the promise? Are highly-ranked ESG \u00a0businesses really more caring of the environment, more selective of the societies in which they operate, and more focused on countries with good corporate governance? In short, is ESG really good? The answer is no.<\/p>\n
We demonstrate this by focusing on a group of companies that are now at the center of the world\u2019s attention: businesses with substantial operations in Russia. Russia\u2019s disregard for the environment, appalling social norms and behaviors, and extremely poor corporate governance are well-known and widely-documented. So one might reasonably expect that business involvement in such a country would detract from the ESG rating of the involved company. To our great surprise, this is not the case.<\/p>\n
We examine the ESG scores and response to the Russian invasion of Ukraine for all European firms with a substantial presence in Russia, which we define as companies with Russian subsidiaries that generate more than US$100 million in sales and that have more than US$100 million in total assets. We focus on Russian subsidiaries of large European firms because these represent significant investments of economically important firms that are unambiguously identifiable from standard sources. We search the Amadeus database of Bureau van Dijk for firms that meet these activity thresholds and intersect this with Refinitiv\u2019s EIKON database to generate a list of 75 non-financial European firms that have significant subsidiary activities in Russia with available Refinitiv ESG scores. On average these firms earned 6% of their sales in Russia.<\/p>\n
Some startling observations emerge. First, as represented in the figure below, the average ESG scores of firms with substantial activities in Russia, a country that is well-known for its corruption and significant human rights abuses, is 78 out of 100. By comparison, the average ESG score of all other similar-sized non-financial European companies (i.e., those with sales in excess of US$2B) in the Refinitiv database is just 64. The average score of the Russia-invested group on the \u201cS\u201d (i.e., social) pillar dimension is 81 versus a comparable European peer group average of just 68. In terms of their human rights performance (i.e., a subcomponent of the social pillar), the firms profiting from Russian activities earn a whopping average score of 84 versus a much more modest 67 for their European peer firms. Remember, higher ESG scores are supposed to be indicative of more <\/em>socially responsible corporate behavior, so according to Refinitiv, European companies with substantial subsidiary operations in Russia are, on average, significantly more \u201cresponsible,\u201d <\/em>both overall (i.e., on the basis of ESG) and on the \u201csocial\u201d \u00a0and \u201chuman rights\u201d sub-dimensions, than comparable European firms with zero or more limited Russian operations in the periods leading up to the recent invasion.<\/p>\n<\/figure>\n
A full 12 days after the invasion, a surprisingly high 28% of European firms had not taken even the most modest form of public action, such as the condemnation of Russia\u2019s invasion or even the expression of a soft voice of support for the Ukrainian people. Even after intensified public pressure, as of today (March 15th) only 53% of the 75 firms have publicly announced significant action in the form of ceasing their subsidiary\u2019s operations in Russia. <\/p>\n
High overall ESG scores combined with slow (or no) meaningful action by many firms begs the ultimate question \u2013 how useful is a firm\u2019s ESG score for predicting its response to the Russian invasion? The answer: not very.<\/p>\n
We use duration analyses to investigate whether ESG predicts the timeliness with which companies announce their withdrawal from Russia. After simultaneously considering the firm\u2019s size, profitability, and the amount of sales being generated in Russia, our analyses yield surprising overall conclusions: there is no statistical association between companies\u2019 ESG scores and the timeliness of a meaningful response to the Russian invasion. If you\u2019re an investor who has been picking stocks based on ESG scores under the assumption that your money is likely to be funding more socially responsible corporate behavior, particularly in periods of extreme crisis such as Russia\u2019s invasion of a sovereign country, you should be very disappointed.<\/p>\n
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