ESG Investing Needs More Rigorous Standards To Evaluate Corporate Conduct
Last week, Tesla, a company with a market capitalization of more than $1 trillion, announced “breakthrough” 2021 profits of $5.5 billion. But there is trouble in the company’s supply chain. The batteries in electric cars like the ones Tesla manufactures require cobalt, a mineral found in abundance in the Democratic Republic of Congo (DRC). While electric vehicles are important in the effort to combat climate change, there are credible reports of serious human rights violations at informal cobalt mines in the DRC, including widespread exploitation of child labor and safety hazards in deep, unstable tunnels. Despite its reliance on these troubling supplier practices, Tesla is a popular stock pick by mutual funds and exchange-traded funds that are marketed as promoting responsible capitalism by focusing on environmental, social, and governance (ESG) goals. Does Tesla deserve to be treated as an ESG champion?
ESG investing has grown rapidly over the last 15 years focused primarily on climate change. Asset managers like BlackRock and Vanguard now seek to attract investors to funds marketed as socially responsible while still offering attractive returns. The value of assets invested in this manner topped $35 trillion globally in 2020, an amount that is expected to rise to $50 trillion by 2025, representing almost one-third of all projected assets under management.
Many companies are included in ESG funds because they have made commitments to reducing carbon emissions and/or they don’t fall into one of the categories of “sin stocks,” such as manufacturers of alcohol or firearms. But in many instances, asset managers don’t pay adequate attention to social problems that flow from a company’s core business, such as poor labor practices in their global supply chains. Most asset managers also fail to take advantage of their voting power as shareholders to help shape better corporate social practices.