Smoke and mirrors: Musk claims ESG is nothing more than a scam. Is he right?

Progressive, climate-savvy Australians have driven so-called responsible investment to new highs.

Sep 12, 2022, updated Sep 12, 2022
Onstage at the shareholders' meeting, Musk described himself as pathologically optimistic. (file photo)

Onstage at the shareholders' meeting, Musk described himself as pathologically optimistic. (file photo)

But they expect more than a tick and flick by companies when it comes to backing up their claims on environmental values, gender and racial inclusion or stamping out slavery.

Environmental, social and governance (ESG) criteria are used to screen investments and encourage companies to act responsibly.

Leading data scientist Andy Moniz says the proliferation of obscure or misleading claims comes as no surprise given there’s no agreement on what ESG investing means.

Billionaire Elon Musk called the criteria a “scam” after the electric car maker was kicked off a key corporate sustainability index.

But ambiguity doesn’t mean ESG should be thrown out altogether, Moniz tells AAP.

He believes artificial intelligence (AI) is an important tool in detecting green-, pink- and brown-washing on corporate targets – a reference to companies making deceptive claims to exaggerate their credentials.

“The key interest we’re seeing in the Australian market is the focus on climate, and how companies are decarbonising and committing to net zero emissions,” he says.

“The key question is how credible and how granular are those communications by companies.”

For example, almost three-quarters (71 per cent) of the top 300 ASX-listed companies have announced decarbonisation plans but only 11 per cent have science-based targets that detail how to get there, Moniz says.

“There’s a clear gap between what companies are saying on the one hand and what they’re actually doing, so it’s very timely to have a tool to assess the credibility of their statements,” he says.

“That is where AI comes in, to dissect the noise.”

More noise is likely to come with a flood of spending, with recent laws in the United States ushering in $US370 billion in climate-related investments and emissions reduction.

Europe’s Just Transition Mechanism will bankroll the transition to a climate-neutral economy, with billions of euros to flow in new loans and grants.

Meanwhile, Australia’s just-passed climate legislation ushers in emission targets and requires investment in cleaner manufacturing, new fuels and electric transport.

Moniz is director of responsible investing at London-based Acadian Asset Management and advisor to the Bank of England as a member of the Artificial Intelligence Public-Private Forum.

He says there has also been great interest from clients in Australia about dissecting modern slavery concerns.

The key issue is mapping out supply chains, which is also crucial for verifying claims on emissions.

Investors and fund managers need to digest an avalanche of information from company filings, press releases, sustainability reports, climate plans, briefings about company results and annual general meetings.

A method called natural language processing can automatically decipher claims on any issue of concern.

When chief executives talked about the impact of mining on Indigenous sites, for example, the AI tool would pick up if they were being cagey or non-committal.

“You train the model to understand language, including responses to questions,” Moniz says.

“The way the algorithm works is that it looks at what an analyst is asking and tries to predict a sensible response that management should perhaps give.”

The actual response is compared with the prediction, looking for cues that suggest evasion.

On climate, market leaders should provide detailed responses with dates and numbers to back up their targets, while green-washers might be vague or deceptive, Moniz says.

“AI can also identify when companies use qualifier statements, where a company talks about something but hedges its language and uses caveats – that’s an example of a linguistic marker associated with greenwashing.”

Assets managed using a responsible or ethical framework have hit $1.54 trillion – a record for Australia, a Responsible Investment Association Australasia-EY report released on Monday found.

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EY partner Emma Herd expects further increases as ESG gets “hard-wired” into investment management.

“It’s going to be increasingly difficult to say, ‘no we are not managing for these issues at all’,” she tells AAP.

Funds must properly identify and manage sustainability on climate risk, energy use and financial performance and, increasingly, must also respond to the needs of clients who want more action.

Herd says that could include cutting all exposure to fossil fuels, screening out gambling firms or arms manufacturers, or looking for firms that had a positive impact.

Some $726 billion in assets under management are being used by fund managers to agitate for change on ESG issues, up 54 per cent from a year earlier.

Herd says there is consensus across the financial sector that mandatory disclosure is needed to support well-informed decisions on risk and investment.

Increasingly, the need for clear rules and definitions is being recognised across many sectors.

“What do we mean by sustainable, what do we mean by responsible investment, and the building blocks of good disclosure on ESG? One of the challenges cited constantly is data availability and quality,” Herd says.

The Investor Group on Climate Change last year released a plan for mandatory financial disclosure on climate risks, while change has been signalled by the Albanese government.

“That is definitely something the government can and should be doing,” Herd says.

Global accounting standards are already pushing in the same direction and will need to be integrated into Australian reporting.

Australia’s competition watchdog has made it clear that false claims on climate credentials create a competitive advantage and will be dealt with under its remit.

Although the focus is on climate, Ms Herd says other social issues are coming to the fore for responsible investors.

The mismanagement of cultural heritage sites, gender diversity and workplace performance are impacting on ASX-listed companies.

“So let’s not forget the ‘S’ in ESG,” she says.

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