Over the past several years many major funding organizations have become more interested in ESG scoring criteria for their decisions. We became interested in this because of 2 recent factors.
One was the apparent increasing difficulty that fossil fuel producers are finding in obtaining new funding for their needs. And since this industry is capital intensive with long lead times, funding problems would surely contribute to the increase in fuel prices. So if there is a movement by firms such as Black Rock to discourage new fossil fuel production, and oil and gas prices continue to rise, that presents a hurdle for US manufacturing’s competitive position. Efforts in support of combating climate change may be a good thing, but if the actions provide no alternative, is this wise? And at present there is no alternative to using fossil fuels in many cases. So the actions that increase fossil fuel costs are simply an extra and unavoidable cost.
The second was a recent radio interview with a West Virginia official who was rallying other states to deny ESG favoring funding organizations from state projects. According to a Breitbart article-https://www.breitbart.com/politics/2022/07/29/west-virginia-bans-five-wall-street-firms-state-contracts-esg-climate-activism/, the WVa Treasurer has banned BlackRock, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo from state banking contracts.
So what’s going on here and what does it mean for US manufacturing, especially small businesses?
What is ESG? While we claim no definitional expertise with ESG, the nickel version is a scoring method that considers a company’s behavior in environmental, social, and government areas. It appears there is no standard definition for scoring; rather, it’s left to the funding source to define score criteria. Here is one summary we found:
ESG Scores Criteria
Most ESG reports and ratings consider all three ESG categories: environment, social and governance.
Environmental scoring factors range from a company’s greenhouse gas emissions to its treatment of animals. Common evaluation criteria include metrics on:
- Climate change
- Soil and water contamination
- Renewable energy
- Environmental policy
Social scoring factors examine a company’s business relationships with employees, suppliers, partners, shareholders, and other groups throughout the supply chain ‘ for instance:
- Are workers in factories abroad treated ethically?
- Do employees earn a living wage?
- Are facilities regularly inspected and safe to work?
- Can employees take leave when they are sick or for other personal reasons?
Social scores may also reflect charitable contributions, customer interactions, community impact and policy influence.
Finally, governance scoring criteria evaluates legal and compliance issues and board operations:
- Does the company abide by all local, state and federal laws?
- Does board composition represent diverse backgrounds and perspectives?
- How does executive and non-executive compensation compare to the company’s peers?
Many ESG scores take industry context into account. Corporate Knights, for instance, only scores companies based on performance indicators that are relevant to their industry.
So rather than evaluating an investment on the basis of profit potential and customer satisfaction, apparently major funding sources, such as Black Rock and several major banks, are imposing all manner of factors into their decisions. While it’s a funding source’s prerogative to decide what the criteria should be, is it reasonable to enforce these wide reaching factors?
What does this mean for those of us in private, small companies? Is your local bank going to evaluate worthiness for a loan based on your climate change actions? Or the diversity of the board of advisors or directors? Perhaps you will be encouraged to evaluate the practices of some foreign supplier, and how does a small company do that efficiently? And do you want your bank working in this manner?
Is this a useful trend or some sort of movement designed by nefarious organizations imposing their views on businesses?
Inquiring minds want to know. We are suspicious of the ESG movement and are most interested to see if other states follow the WVa example. Manufacturing has enough on the plate and doesn’t need to be distracted by ESG funding requirements in our opinion.
We would be most interested in your views; please contribute to our blog!