Sustainalytics, another ESG rating, gives Tesla a worse score than Altria, one of the world’s largest tobacco producers.
Companies like Altria have gone out of their way to emphasize the diversity of their boards and the breadth of their social justice initiatives, from funding minority-owned businesses to promoting transgender women in sports.
But Tesla, whose executives are mostly white men, has resisted that bandwagon, going so far as to fire its top LGBT diversity officer last year.
The “S” of ESG typically includes diversity programs. Philip Morris International, which announced a partnership with “African data scientists” in 2021, earned a social score of 84 from S&P Global. Tesla scored a whopping 20.
The contrast highlights the dangers of a movement that lumps together urgent health and environmental issues with ideological fads. Early ESG efforts were laser-focused on “sin stocks,” companies whose core business was considered immoral, including tobacco.
But as ESG investing has grown, so has the number of variables used in ESG ratings, which now encompass everything from labor practices and carbon commitments to diversity and human rights training.
This has created countless opportunities to game the system, experts say, and allows even the shadiest companies to score points — and investors — by toeing the line.
“ESG company ratings often measure abstract goals that have no rational connection to the companies’ actual businesses,” said Boyden Gray & Associates managing partner Jonathan Berry, who sued NASDAQ last year for its diversity requirements for corporate boards of directors.
And its supply chain involves a litany of environmental sins: the industry’s carbon footprint is substantial, and even e-cigarettes, marketed as a less harmful alternative to tobacco, can cause serious pollution because they don’t biodegrade.
Tobacco cultivation, which is mainly done in developing countries, causes deforestation and soil erosion. Tobacco workers are exposed to toxic chemicals, including high doses of nicotine, which can lead to hospitalization.
But ESG ratings often mask these effects. Some ratings, including S&P Global’s, say in the fine print that they are industry-specific, meaning companies are held to different standards depending on their industry.
An unusually green tobacco giant could score better than an electric car maker with an all-male board, and corporations can score points just by setting water reduction targets or using “diverse” suppliers.
Philip Morris International and British American Tobacco tout their scores on the Bloomberg Gender Equality Index, Tesla is not a part of, which uses self-reported data to track companies’ progress toward “equitable inclusion.”
Most ESG funds exclude tobacco from their portfolios due to its harmful health effects. But cigarette makers hope to change that.
That expansion is largely due to the rise of smokeless products, which now account for a third of Philip Morris International’s revenue. But critics say the ESG movement and the progressive marketing it fosters have also played a role in legitimizing the cigarette industry.
“ESG reports allow tobacco companies to promote their corporate social responsibility (CSR) initiatives,” according to DEI, “while obscuring the significant health, economic and environmental damage they cause.”
Some classification systems even encourage cigarette manufacturers to market their products to marginalized groups. Altria has a perfect score on the Human Rights Campaign’s Corporate Equality Index, which allows companies to earn points by “advertising to LGBTQ consumers.”
Altria said in a statement that it does not “target the LGBTQ+ community” and that it earned its perfect score through other initiatives. Philip Morris International did not respond to a request for comment.
In the early 2000s, the company used “corporate social responsibility,” the precursor to ESG, as a prophylactic against lawsuits, according to a memo from then-Philip Morris general counsel Steve Parrish.
ESG ratings can serve a similar purpose today. By doing well with them, tobacco companies can placate regulators and investors who think the “smokeless future,” as Philip Morris International calls it, is taking too long to materialize.
“A bad ESG score announces to the world that you’re a troglodyte,” said Todd Henderson, a professor of law and economics at the University of Chicago. “This could be an invitation for socially conscious shareholders to seek board seats or oust a CEO.”
BlackRock, State Street and Vanguard joined forces in 2021 to oust three ExxonMobil directors who were out of line with investors’ climate priorities. All three companies own significant stakes in cigarette companies, giving them a considerable number of representative votes.
Tobacco’s social justice talk, Henderson said, may be a ploy to avoid Exxon’s fate.
All of this feeds into a broader criticism that the ESG movement turns investors and rating agencies into de facto philosopher kings, weighing different and sometimes incommensurable values against each other.
“You have to measure the goodness of women on corporate boards and compare it to the badness of killing people,” Henderson said. “This is really a question for Plato.”
The shock of values, he added, is one reason why ESG scores vary significantly between different rating agencies, meaning that companies like Altria can usually find at least one good number to show investors.
It got a lower environmental score than the automaker, but scored more than twice as high as Musk’s company on social issues, where the oil titan has flexed its marketing muscle.
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