Just as it’s important to address the ‘E’ in ‘ESG’, to provide solutions that mitigate the overt environmental effects of climate change, it’s perhaps more crucial to focus on the social, like employee health, pollution, and overall satisfaction. ESG scoring is calculated by third-party rating agencies that specialize in this area, emphasizing the importance of accurate data and disclosures for improving ESG scores. Yes, there are companies doing a great job of ensuring employees feel supported. However, there are several others that are terrible at ensuring employees feel valued and they end up getting low ESG score.

Investors know this as well, since ESG measurement tools and ESG ratings can reveal a poor social score, reflected in exactly what these companies offer in terms of social sustainability. Here’s a random sprinkling of cross-sector companies who are not exactly ‘blossoming socially’.

What are ESG Ratings and Why Do They Matter?

ESG ratings are a crucial tool for evaluating a company’s performance across environmental, social, and governance issues. These ratings, derived from comprehensive ESG data, help investors assess a company’s ESG risks and opportunities, guiding them in making informed investment decisions. Essentially, ESG ratings provide a snapshot of how well companies manage their responsibilities towards the environment, their employees, and their governance structures.

Why do ESG ratings matter? For one, they offer a way to gauge a company’s sustainability and ethical practices, which can significantly impact its long-term financial performance. Companies with high ESG ratings are often seen as more attractive to investors because they are perceived to have lower ESG risks and better management practices. This perception can lead to increased investor confidence and potentially higher stock prices. In the world of sustainable investing, ESG ratings are indispensable, helping investors prefer companies that align with their values and long-term financial goals.

Companies with Low ESG Scores

Companies with low ESG scores are those that fall short in their environmental, social, and governance performance. These companies might struggle with high carbon emissions, poor labor practices, or weak governance structures, making them less appealing to investors. From an investment perspective, companies with low ESG scores are often viewed as riskier. They are more likely to face regulatory fines, reputational damage, and other negative consequences that can impact their financial stability.

Moreover, companies with poor ESG scores may find it challenging to attract top talent. In today’s job market, employees are increasingly prioritizing employers with strong sustainability and social responsibility track records. This shift means that companies with low ESG scores might struggle to recruit and retain skilled workers, further impacting their overall performance and competitiveness.

Twitter

As part of Silicon Valley, Twitter workers used to enjoy several perks that came with their jobs. Employee health and safety were also prioritized with various wellness programs. There were options to work from home, gourmet lunches, and other benefits like reimbursements for wellness, classes, and day care. But since Musk’s takeover, a lot of those perks are gone (along with a large number of employees), as the company is nosediving steadily.

Facebook

Facebook's decline in social scoring has played out in a similar fashion to Twitter's. You already get a hint of it from the fact that Mark Zuckerberg expected his own employees to work in the Metaverse, something that employees now begrudgingly comply with.

But the social culture of Facebook wasn't always like this. As the S&P index noted in its removal of Facebook from its ESG index, its social score has been declining dramatically since 2015. This decline has stemmed from the fact that people are realising some of the dangers of the company. For sure, Facebook itself is offering some pretty nifty perks, and it was once a great place to work. But as of 2023, Glassdoor dropped both Facebook and Apple from that list.

Setting aside Apple's work conditions, newer employees at Facebook might find themselves contracted out to other companies instead while still being part of the company. In 2019, we've seen glimpses of those conditions, which are playing out similarly to what's seen on Twitter.

EchoStar Corp

Look up the ESG rating of EchoStar, and you'll find it a big problem with disclosure. There are no reports at all on employee health and safety, product responsibility, or emissions. This doesn't mean EchoStar isn't aware of these issues; rather, they are making efforts to not disclose this information at all.

The only extent of their disclosure is that they volunteered to reduce the energy usage of their set-top boxes. This is undercut by the fact that they made this announcement in 2012 and there has been no announcement about progress or results.

Rex Minerals Ltd.

Even though there are many mineral and mining companies working to incorporate more ESG into the industry, there are several mining companies that lag behind. One example is Rex Minerals Ltd., a company that discloses less than other mining companies.

This has resulted in two conclusions: either Rex Minerals is hiding something or is unable to perform ESG surveys in general.

There is plenty of rationale for both cases, as Rex Minerals discloses in great detail about the projects it does. That can't be said about its commitment to sustainability, where it lists several buzzwords but doesn't point to specific examples or goals.

Chevron Corporation

The US-based oil giant has been heavily reprimanded for its environmental impact, very noticeably for its Lago Agrio oil field operations in Ecuador. This incident alone led to significant pollution and several legal battles. Recently, according to research by NGOs Urgewald and Facing Finance, large corporations, including Chevron, have invested more than €123B in fossil fuels and continue their operations with impunity under feeble regulatory frameworks. Also, the company is taking a heavy toll on local communities and ecosystems in Angola and Brazil due to frequent oil spills and environmental degradation.

BP (British Petroleum)

Of late, BP has disbanded its low-carbon mobility team, which was responsible for developing electric and hydrogen vehicle solutions, eventually rendering many jobless and affecting employee morale and public image. Meanwhile, top executives have resigned amid mounting pressure from shareholders over the company's environmental strategies.

The UK oil company has also retracted its net-zero commitments and increased investments in fossil fuels in the Middle East and the Gulf of Mexico. The company's earlier climate and environmental commitments were made by its former CEO, Bernard Looney. It cited financial pressures and political pushback as having a huge influence on the recent turnaround in ESG investment.

ExxonMobil

ExxonMobil’s low ESG scores are due to environmental justice concerns, lawsuits against shareholders and greenwashing. The company has been accused of polluting minority communities, ranking poorly on racial equity. It has also been sued by shareholder groups pushing for emissions reductions and allegedly misled the public on plastic recycling. Historical environmental incidents like the Exxon Valdez oil spill add to its bad reputation.

A survey by Carbon Tracker in 2024 revealed the environmental impact of 25 major oil and gas companies, and among them, ExxonMobil ranked lowest with a 'G' grade, showing that its Paris Agreement commitments are off track and that it is doing nothing to limit global warming to 1.5 degrees Celsius. This is mainly due to increased investment in oil and gas production without comprehensive emissions reduction targets or an ESG assessment.

READ MORE: What Is Greenwashing? Top Examples You Need To Know

Fox

Setting aside the politics surrounding the company, employees have shared their own horror stories in the past. Employee satisfaction has been a significant concern within the company. From the real reason Kimberly Guilfoyle left to Bill O’Riley’s sexual harassment cases and the recent and unexpected firing of Tucker Carlson, these events are indicators for how this company treats its employees.

In the recent case of Tucker Carlson, he was on air for years peddling known lies, conspiracy theories, and hate messaging. And yet he was fired via text message, and it was announced on the network.

Walmart

Socially responsible investors and customers last year were traumatized by the world's largest retailer's decision to roll back its diversity, equity, and inclusion (DEI) initiatives. The company backtracked on its $100 million racial equity program and withdrew from the Human Rights Campaign's Corporate Equality Index. It has also been quite infamous for its unethical labor practices, including anti-union policies and poor working conditions.

Incidentally, Walmart also recently announced that it would not meet its interim climate targets for 2025 and 2030 owing to a lack of low-carbon technologies and infrastructure.

DWS Group

The asset management division of Deutsche Bank has agreed to pay a €25 million ($27 million) penalty for misleading responsible investors and overstating its ESG commitments in marketing campaigns. This follows another greenwashing attempt in 2023, when the company reached a $25 million settlement with the U.S. Securities and Exchange Commission for similar ESG-related issues and anti-money-laundering control shortcomings.

How Companies Manage ESG Risks

Companies manage ESG risks by implementing a variety of strategies and practices that address environmental, social, and governance issues. Effective ESG risk management can lead to improved financial performance and reduced risk exposure. Here’s how companies are tackling these challenges:

• Risk Management Practices: Companies with high ESG scores often have strong risk management practices. These practices help them understand potential pitfalls and capitalize on opportunities, ultimately leading to better financial outcomes.
• ESG Assessments: Regular ESG assessments are important. They help companies identify and manage ESG risks, as well as provide investors with a comprehensive view of their ESG performance. This transparency is key to building trust with stakeholders.
• Stakeholder Relationships: Prioritizing ESG issues can build strong relationships with investors, customers, and employees. Companies that are seen as socially responsible are more likely to attract and retain top talent and loyal customers.
• Waste Management Practices: Sustainable waste management is a critical component of ESG risk management. Companies that adopt eco-friendly waste practices can significantly reduce their environmental impact and improve their public image.
• Tracking ESG Performance: Using ESG metrics, such as those provided by MSCI ESG Research, helps companies monitor their ESG performance and pinpoint areas for improvement. This continuous monitoring is essential for maintaining high ESG standards.
• Investor Preferences: Investors prefer companies with strong ESG scores because they typically have lower risk profiles and better long-term financial performance. This preference is driving more companies to focus on improving their ESG scores.
• Sustainable Investing: ESG scoring is a cornerstone of sustainable investing. It provides a framework for evaluating a company’s commitment to environmental, social, and governance issues, helping investors make informed decisions.
• Benchmarking with Indices: The Dow Jones Sustainability Index is a widely recognized benchmark for ESG performance. Companies included in this index are often seen as leaders in ESG practices, which can build their reputation and attract more investors.
• Governance Practices: Companies that prioritize ESG issues tend to have better governance practices. Strong governance can lead to improved financial performance and reduced risk exposure, making these companies more attractive to investors.
• Strategic Improvement: ESG assessments help companies identify areas for improvement and develop strategies to address ESG risks and opportunities. This proactive approach is essential for long-term success.
• Informed Investment Advice: Investment advice that incorporates ESG factors can help investors achieve their financial goals while promoting sustainable investing practices. This dual benefit is increasingly appealing to modern investors.

By implementing these strategies, companies can effectively manage ESG risks, improve their ESG performance, and improve their overall performant. This not only benefits the companies themselves but also aligns with the growing trend of sustainable investing, where investors seek to support businesses that are committed to ethical and sustainable practices.

The Consequences of Bad ESG Scores

The repercussions of bad ESG scores can be far-reaching and severe. Companies that neglect their ESG performance may face a variety of negative consequences, including:

• Regulatory fines and penalties: Non-compliance with environmental or social regulations can result in hefty fines and legal penalties, adding to operational costs.
• Reputational damage: Poor ESG performance can lead to negative publicity, tarnishing a company’s brand and eroding customer trust.
• Loss of investor confidence: Investors are increasingly wary of companies with poor ESG performance, viewing them as high-risk investments. This can lead to a decline in stock prices and reduced access to capital.
• Difficulty attracting top talent: As more employees seek out companies with strong ESG commitments, those with bad ESG scores may struggle to attract and retain skilled workers.
• Increased costs: Companies with poor ESG performance may incur higher costs, such as elevated energy expenses or the financial burden of cleaning up environmental damage.

In summary, companies with bad ESG scores face significant challenges that can impact their financial health and market position. Prioritizing ESG performance and sustainability is not just a moral imperative but a strategic necessity for long-term success.

Takeaway Investment Advice

Ok, so this wasn’t a deep dive into the specific reasons why certain companies are failing to deliver on selected ESG-derived social value metrics. It does, however, provide a wide-angle view on a batch of businesses that are currently deeply impacted by their lack of commitment to prioritising people, which is overtly reflected in their ESG ratings.

‘ESG’ is merely the contemporary attempt to capture the various streams of operational importance in a company’s workings, based around the premise that transitioning to sustainability requires several angles of approach. However, if the people really are the business, then the emergent logic is that we start with the social values and the rest, very connectedly, follows. This perspective is crucial for making informed investment decisions. Take a very quick glance at an expanding range of companies to determine their ESG performance, via our Company ESG Profiles.