No Green Light

Phil Kernen

MORE AND MORE investors are using environmental, social and governance (ESG) criteria to direct their investment dollars toward companies fighting climate change. An obvious question: Do companies that deliver “green” innovations earn high ESG scores?

It seems not. The authors of a recent study from the European Corporate Governance Institute found that:

  • Companies with lower ESG scores are producing more and higher-quality innovations designed to mitigate climate change.
  • A sizable percentage of recent U.S. green patents have been issued not to highly rated ESG firms, but to those typically shunned by ESG funds.
  • The green patents granted to energy-producing firms—which usually don’t score well on ESG criteria—are significantly higher quality, as measured by the number of times these patents are cited by others and by the number that are considered “blockbuster” patents.
  • Compared to other industries, the energy sector is nearly three times more focused on green innovation, based on the number of green patents received relative to total patents received.

Out of the top 50 green patent producers, 14% are energy firms typically excluded from ESG funds. These firms include Exxon Mobil, Royal Dutch Shell, BP, ConocoPhillips and Chevron, which produced 6,969 green patents as of 2017. Despite this, energy firms receive much lower ESG scores, minimizing or eliminating their representation in portfolios driven by ESG factors.

That brings us to a second obvious question: If the idea of ESG investing is to reward those companies that are striving to arrest or reverse climate change, how much progress will we make if we minimize investments in those companies coming up with the most innovative ideas?

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Mik Cajon
Mik Cajon
1 year ago

I suggest focusing more on China’s participation and/or lack of in climate change reduction.

Jack Hannam
Jack Hannam
1 year ago
Reply to  Mik Cajon

Agree. Whenever someone proposes an action to take, or more often, to impose on others, the first question I ask is how much of a global impact will that have, and at what cost? According to BBC News on May 7,2021 for the year 2019, China emitted 27% of global greenhouse gasses, USA 11%, and India 6.6%. Furthermore, emissions from China and India are projected to rise due to their unprecedented building of new coal fired power plants and cement production. I am more interested in cost benefit analyses to identify strategies which will provide the “biggest bang for the buck” in dealing with global greenhouse gas emissions and global warming. China and others will more likely adopt effective strategies, developed by us and or them, that make economic sense. Other approaches, like treaties, promises, coercion will prove to be ineffective. In evaluating companies, I prefer not to confuse innovative approaches with virtue signaling.

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