While investors have been throwing billions of dollars into environmental, social, and governance investments, many are not doing their due diligence and just focusing on some big brand names they believe are ESG compliant.
According to a recent study conducted by Investopedia and TreeHugger, many respondents have been influenced by brand perception instead of a company’s policies on ESG-related issues, Yahoo! Finance reports. Among the top picks, many were middling from an ESG-rating perspective.
“We listed a bunch of other stocks there, including some energy stocks, just to see how our readers and the TreeHugger readers would react,” Caleb Silver, editor-in-chief at Investopedia, told Yahoo Finance. “Many of them chose some of those energy stocks as ranking very high in ESG as well. That tells us they’re winging it when it comes to research and associating with the brand versus putting the stocks they are interested in into an ESG screener.”
For example, Tesla was a top pick, with 30% of respondents associating the electric vehicle maker with ESG values. However, the electric vehicle maker doesn’t score that highly on ESG criteria.
“What’s interesting about Tesla is it doesn’t score that well, if you look at MSCI’s ESG Ratings or Sustainalytics— pick your provider,” Silver added. “They’re about right in the middle of the pack.”
Sustainalytics even rated Tesla as having “High Risk,” mainly due to governance issues and labor relations.
Investors should understand that ESG represents three separate categories: Environmental, Social, and Governance. If a company scores well on one criteria, it doesn’t mean the same for the other two, which is the case for the second-ranked company, Apple.
“I think Apple’s known for a good employee culture,” Silver said. “It’s what they do with their byproducts of the iPods, the iPhones, the laptops that they make. The waste disposal was a big key component.”
For more market trends, visit the ESG Channel.