You may have heard of ESG (Environmental, Social, and Governance) investing. It’s also called “socially responsible investing” when ethics is added to the picture. Public companies are assigned an ESG score, which is a quantification of the social impact. What social impact though? You would probably expect ESG ratings to quantify the societal impact of (not on) a company, right? Well, you’ll be disappointed. “Socially responsible investing” is a misnomer when associated with the ESG ratings, at least those reported by MSCI, a leading provider of the ESG ratings globally.
MSCI basically quantifies the impact of environmental, social, and governance risks on a company’s operations (not the other way around!). In other words, if we rely on ESG ratings while making investment decisions, we may not be doing any social good. We are essentially ensuring that our investments are protected from the environmental, social, and other risks such as climate change. After all, why would we care about the carbon footprint of our investments on the environment as long as profits are good?
MSCI’s plot offers some takeaways on how to generate data and model it. Apparently, measuring reverse causation and packaging it to look like the cause and effect are in the right place can be quite profitable. To be fair, MSCI is explicit about its data generation and modeling process residing in the darkside.