One of the world’s leading financial data companies, MSCI, has launched an App. For financial nerds, this is an exciting development, providing information about companies on your mobile phone at the touch of a button. The app includes ESG (Environmental, Social and Governance) scores for a huge number of quoted companies.
Having an app like this is like the first time you get a dictionary and find out that there are rude words in it too. So, when I got the app, the first thing I wanted to find was which company had the worst ESG rating. Sadly, MSCI only tell us about the ESG Leaders (they have a special index for this) – there’s not much said about the ESG Laggards.
The obvious place to start my search was with tobacco companies. FTSE 100 tobacco company Imperial Brands would surely be close to the bottom of the ESG heap – the makers of JPS, Lambert & Butler, Gauloises and Gitanes must be one of the least responsible investments available, or so I thought.
Imagine my surprise when I clicked on Imperial Brands in the app, and found that MSCI awards it an A rating for ESG. So I looked at some other quoted cigarette companies. It’s quite hard to find one that MSCI rates badly – the makers of Marlboro get an average rating, whilst Silk Cut owners Japan Tobacco gets a BB rating (which is just below average).
So, what is going on?
MSCI’s ratings are relative – they rate companies in an industry against each other. So, Imperial Brands is a more responsible company than Japan Tobacco. MSCI doesn’t rate the industry they operate in, they just rate the companies in that industry against each other. Swedish Match, which has diversified away from tobacco, but still makes some tobacco products (e.g. cigars), gets an AA rating.
Back in the early noughties, the seeds of the Global Financial Crisis were sown by a blind reliance on ratings provided by “independent” rating agencies like Moody’s and Standard & Poors. If you have ever watched ‘The Big Short’, you will know just how easily ratings can be manipulated.
ESG investors can learn from experience. In order to achieve your responsible investing objectives, you need to rely on more than a rating agency – the guidance of an expert may be the best investment you can make.