Flaw #1: Prior to the 2022 Russian invasion of Ukraine, ESG indices typically excluded defense contractors. Companies that sell ratings of corporate ESG performance likewise downgraded defense companies. In the wake of outbreak of war, however, many rating firms, ESG funds, and index suppliers are reconsidering the exclusion of defense companies. The Russo-Ukrainian war also raised questions about whether fighting climate change was more socially responsible than dealing with inflation and the impact of energy prices on the poor. James Mackintosh, Do Good Investing is Under Pressure, Wall St. J., Mar, 28, 2022, at B1. Trying to be socially responsible is exceeding difficult when the definition of what is socially responsible involves clashing goals and rapidly changing perceptions about what is pro-social.
Flaw #2: European corporations with major operations in Russia prior to the outbreak of the Russo-Ukrainian war typically had higher ESG ratings than those who were not operating in Russia. Doing extensive business in an increasingly authoritarian and militaristic apparently had little, if any, impact on the ESG industry’s perceptions of those companies. Perhaps even more instructively, however, is that companies with lower ESG ratings were more likely to divest or suspend any Russian operations than did companies with higher ESG ratings. Id. All of which tends to call into question the merits of the ESG industry’s claims to be socially responsible.
