To better understand what an ‘ESG’ investment might be, in this post I will evaluate four of the world’s biggest companies, to see how they fare under the ‘ESG’ lens.
Currently, based on 12-month trailing revenue, Walmart is the world’s biggest company. Walmart is an American supermarket chain which offers a range of services and currently operates in 25 countries across the world. Walmart is most famous for its supermarkets, but it also offers financial services including debit and credit cards, wireless phone services and health services. To evaluate Walmart’s ESG credibility, each of the three factors (Environment, Sustainability and Governance) must be evaluated.
So, how does Walmart perform on environmental issues and sustainability? In September last year, Walmart announced that it is targeting zero carbon emissions by 2040 and aims to protect, manage or restore at least 50 million acres of land and one million square miles of ocean by 2030 – clear evidence that Walmart is committing to combatting environmental issues. However, Walmart’s sustainability can be questioned. Previously, Walmart was heavily criticised for the selling of weapons, but, in recent years, Walmart has removed all gun and ammunition displays in its stores. The company even wrote a letter to Congress calling for improved gun laws. In addition to this, Walmart is expanding its number of healthcare centres, improving access to this service.
What about governance and treatment of its employees? Walmart offers associates the opportunity to earn debt-free, high-quality degrees in business or supply chain management, has been increasing the wages it pays to workers and increasing the amount of paid maternity leave employees are able to claim. Currently, 7 of 11 of Walmart’s board of directors are independent; however, only 27% of the board is female, so it needs to improve on gender equality.
Given that it performs well on almost all other factors, Walmart could be considered for inclusion in an ‘ESG’ portfolio. But it is still a matter of individual preference – whilst some may consider the low level of female representation of utmost importance, others may see it as less of a disadvantage.
Apple is one of the biggest companies in the world. It would be hard to find someone who hasn’t heard of them.
In recent years, Apple has been making a huge effort to decrease its carbon footprint; the iPhone 11 series are the first phones to have ever been made from recycled materials. In addition, Apple also has a goal of having all suppliers run on renewables by 2030.
In terms of Apple’s impact on society, its products have helped people to communicate easier, its laptops are used for scientific research and access to education and information has improved.
However, Apple have been criticised on grounds of governance and sustainability. In 2019, Apple broke Chinese labour laws by employing too many temporary workers and the company is known for employing cheap labour. It has been estimated by SACOM (Students & Scholars Against Corporate Misbehaviour) that workers earn approximately $1.62 an hour despite the estimated labour cost of an iPhone being just $0.27. When you consider that iPhone’s can sell for over £1000, there seems little doubt that Apple’s workers could be paid better. Only two of the seven members of Apple’s board are female. However, almost all of Apple’s board is independent.
My view is that Apple shouldn’t be included in an ESG portfolio. On the one hand, Apple is leading the way in sustainable technology, with renewable energy use and the use of recycled materials. On the other, to my mind, its poor treatment of workers outweighs the environmental progress it has made. It might be suitable for a fund or portfolio which focussed purely on environmental issues, however.
There has been a huge amount of debate about Amazon’s ESG credentials.
Amazon aims to become Carbon neutral by 2040, to be using 100% renewable energy by 2025 and it is in the process of purchasing 100,000 electric vehicles. However, in 2018, Amazon released 44 million tonnes of CO2 – more than similar companies such as UPS and Fedex. Whilst Amazon Prime may be great for consumers, next day delivery has a much worse effect on the environment than a 2-3 day delivery service. And delivery isn’t the only issue – on top of the amount of fuel used to get the packages to the destinations, Amazon also uses large quantities of cardboard to package its products. Cardboard is easy to recycle, but the US, Amazon’s biggest market, is particularly bad at recycling. Amazon’s environmental impact is hugely negative and although it has plans to change, many have called its commitment to these objectives into question.
While its environmental impact is considerable, Amazon has clearly had a positive impact on society, as its wide reach and accessibility has enabled many smaller companies and start-ups to grow whilst its cloud service has proved vital for businesses across the globe. However, many have raised social concerns about the company. Privacy concerns have been raised after Amazon gave its facial recognition tools to the US police service and Amazon’s treatment of workers has also been criticised. During the pandemic, Amazon were slow to implement Covid safety measures in the workplace and some of the workers who went public with their complaints were laid off. It doesn’t take much effort to uncover a number of claims regarding Amazon’s poor treatment of workers.
Amazon also falls short on governance and equality. A report published in 2018 found that 78% of senior leadership roles were occupied by men, as well as a number of lawsuits filed by women alleging discrimination. Although Amazon is taking steps to improve this, it falls far behind its industry competitors.
Most people would agree that Amazon shouldn’t be considered an ESG investment. However, this doesn’t mean that the company won’t change, and it could become part of an ESG portfolio if there is evidence that it is committed to achieving its objective.
One of the most discussed companies in the world, due to its iconic product and eccentric founder, many would consider it an ESG investment, but is this true?
In terms of its environmental impact, Tesla is, of course, a leader in the electric car market and a major manufacturer of solar photovoltaic systems. The company has also built the world’s largest lithium-ion battery which stores renewable energy from wind turbines. Tesla has also looked to innovate in production with plants built to rely solely on renewable energy and the company has implemented features such as waterless car machines.
But whilst this should mean that Tesla performs well on environmental factors, in January 2021, Tesla purchased $1.5 billion of bitcoin. In 2020, Bitcoin gave rise to roughly 37 megatons of CO2 and it is estimated that, this year, its CO2 emissions will exceed those of the Netherlands. Tesla’s investment into Bitcoin has caused some to question where their money is going and what the business stands for.
Tesla’s sustainability also has to be questioned. Although electric cars should be better for the environment, they are not carbon neutral – energy is still required to charge the vehicles, and that energy may not be carbon neutral. Advances have been made in alternative fuel sources, such as hydrogen. In 20 years, electric cars may be the petrol cars of today.
Tesla’s governance is controversial. The independence of Tesla’s board of directors has been questioned, with many board members having ties to Elon Musk. Musk himself has been at the centre of a number of social media controversies, including an investigation by the SEC in 2018 for suggesting that he was going to take Tesla private. Perhaps more importantly, there have also been accusations of bad treatment of the indigenous population near the lithium mine in Argentina and cobalt having been mined under harsh conditions.
Tesla is a great example of how investments can appear ESG at first sight, but after a further analysis, might not score well enough on ESG factors for inclusion in a portfolio.
If you are investing in shares and bonds directly, you can make your own choices about which companies are included in your portfolio. But if, like most people, you invest using funds, then you need to know what factors the manager will use to determine whether a company qualifies for inclusion in the fund. That’s why it’s important to have professional guidance.
This guide is for information purposes only and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest.