The Standard and Poor’s 500, or simply the S&P 500 is one of the largest stock market indexes and one of the most popular. Do S&P 500 listed companies follow ESG Criteria? And even if so, should we look also at other resources when evaluating a company?
In this article, we will talk about ESG Criteria but also have a look at the findings of the Impakter Index. A look at those two will give a better view of the S&P 500 companies.
What are ESG Criteria?
According to Investopedia, environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations. In other words, the ESG criteria help people take a more socially conscious approach when investing. The criteria are separated into three categories: environmental, social, and governance. Each area focuses on even smaller issues.
Environmental Criteria – Evaluates how a company takes on environmental challenges:
Energy Use, pollution, waste management, resource conservation, treatment of animals.
Social Criteria – Consider companies’ business relationships:
Customer Satisfaction, data security, fair labor trades, interest from stockholders.
Governance – Focuses on the standards that run the company:
Diversity of Board Members, corporate transparency, CEO Independence from Board Chair.
Evaluating a Company’s ESG Criteria Using the MSCI’s Website
How can you decide whether an S&P 500 company follows ESG criteria? One way is by looking at the ESG rating on the MSCI website. It is the largest ESG rating company in the world, the one investors have regular recourse to, in large part because it is very easy to use: The ratings range from C to AAA. C is the worst rating and AAA is the best.
Take Microsoft, for instance. Its ESG rating is AAA. This shows that the company is a leader for other companies to follow. In contrast, Meta, previously known as Facebook Inc., has a poor ESG rating of B. This makes the company a poor performer by ESG standards.
There are problems however with MSCI that were recently revealed in a ground-breaking Bloomberg investigative article that made waves. Entitled The ESG Mirage it argued that MSCI “doesn’t even try to measure the impact of a corporation on the world” bringing conclusive evidence to support this affirmation; and it concluded that “it’s all about whether the world might mess with the bottom line.”
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Impakter Sustainability Index: Going Beyond ESG Criteria
Leaving aside MSCI, potential investors can explore the Impakter Sustainability Index. Unlike MSCI, Impakter’s index evaluates a company’s ESG actions and policies using mega-evaluation techniques that pull together in a single rating the findings of the most widely accepted business rating systems, giving more weight to ratings that are produced by experts who are independent of the business under evaluation.
Further, the Impakter Index gives special weight to labels such as the US Environmental Protection Agency Water Sense or 1% For the Planet which was specifically created to fight greenwashing and provide accountability. The Impakter Index in fact is designed to be in line with internationally accepted standards, as developed by the UN SDGs and the OECD business guidelines.
Also, the Impakter Index is easy to comprehend, and this is the only way it is similar to the MSCI: It follows the well-tested model of credit rating agencies like Moore, Standard & Poor’s and Fitch, with all ratings translated into a clear scaling system based on 5 letters (A, B, C, D and F for fail).
For now, the Impakter index includes only the 100 top brands and 100 top employers as defined by Forbe’s list but in the near future, it will be expanded to more companies and the plan is to develop it into a global index.
To understand better how the Impakter Index actually works, it is worth taking a look at the companies it has evaluated.
Looking at some S&P 500 Companies that “supposedly” align with ESG criteria: Does the Impakter Index confirm it?
Take Google. It uses solar, wind, and other renewable energies. The company plans to decrease carbon emissions and to be carbon-free by 2030, aligning with United Nations’ goal. As a result, the Impakter Index rates the company with a “B” score, considering these efforts.
Or take Adobe Inc. It has one of the highest retention rates and provides great benefits for its employees. As mentioned in Great Place to Work “94% of employees at Adobe Systems Incorporated say it is a great place to work compared to 59% of employees at a typical U.S.-based company.” Accordingly, the Impakter Index evaluates Adobe as doing a great job too, considering they have also committed to using 100% renewable energy.
Another S&P 500 company, JP Morgan Chase, helps its local community through new business plans and generous donations. The company has invested $100 million in diverse-owned and -led financial institutions.
The company seems to be taking serious steps towards sustainability, however, JPMorgan Chase remains the largest financer of the fossil fuel industry and was branded by Forbes as the ‘dirtiest bank to fund fossil fuels. Since 2016, JPMorgan Chase has invested $316.735 B in fossil fuels. Because of all this, the Impakter Index has given the company a “D” score.
How S&P 500 Companies DO NOT Align with ESG Criteria
There are many other companies that don’t align with ESG criteria.
Oil and gas company, Exxon Mobil, is one of the leading contributors to CO2 and CH4 emissions. About 3% of global emissions actually come from Exxon. The company has also been responsible for many oil spills in the past.
In recent years, Meta has violated user security through data breaches. These breaches leaked millions of users’ personal information, causing outrage. People felt confused and betrayed.
Some companies even have their employees working in poor conditions. For instance, Apple Inc. factory workers in India were forced to sleep in rat-infested dorms with no running water. Also, a strike broke out after a food poisoning outbreak led to many Apple worker hospitalizations.
Are S&P 500 Companies Aligned with ESG Criteria? Yes and No
Yes, some top listed companies from the S&P align to some degrees with ESG criteria. But not all of them. Overall, S&P 500 companies will vary in ESG rating. A company with a good rating in MSCI may have a bad rating in Impakter’s Index – and this should come as no surprise, given the difference in methodology between MSCI and the Impakter Index.
When making decisions about investing, having a look at different resources could make a big difference.
Editor’s Note: The opinions expressed here by Impakter.com columnists are their own, not those of Impakter.com.