The rise of ESG investing attracts strong opinions — from the positive to the skeptical to the downright dismissive. But for most CEOs at large corporations, there’s little debate left about environmental, social and governance being core to business thinking and leadership.
“The left criticizes ESG and corporate America for greenwashing … ‘it’s all just talk.’ And the right criticizes it because it’s ‘woke-ism … it’s political activism, and businesses have no business taking it on. Where they would meet in the middle is if they talked to a CEO who says ‘actually, this is in my best interest, to think about stakeholder value creation, because it makes the company more successful and society healthier. In this middle area is where we sit,” says Martin Whittaker, founding CEO of Just Capital, which just released its annual ESG ranking of the top 100 large-cap publicly traded U.S. companies.
The C-suite knows that more investors have been voting with their dollars in recent years, with assets in ESG funds now reaching into the trillions, and with the rise of passively managed indexed funds, greater shareholder power being placed under the control of asset management giants such as BlackRock. No firm, no matter how large or iconic, can escape the ESG momentum. Warren Buffett’s Berkshire Hathaway saw shareholder resolutions focused on core ESG disclosure receive unprecedented support last year.
“The growth of ESG investing has made all these issues a lot more common now,” said Elizabeth Levy, portfolio manager and head of ESG strategy at ESG investment firm Trillium Asset Management. “In years past, when I would ask CEOs ESG questions I would get, if they didn’t roll their eyes, they would think about rolling their eyes. I have been surprised by the extent to which companies are bringing up ESG issues with all investors now, bringing them up on quarterly calls,” Levy said.
The reasons for companies to lean into ESG aren’t limited to external communities. “In a lot of cases, it is for their own employees,” Levy said, noting that the current labor market is not one in which companies which are slow to place emphasis on ESG issues will win the war for talent.
As a new generation of investors gravitates to ESG as a core part of portfolio construction and stock selection, and the labor force goes through generational transitions, the need for ESG research continues to increase. Just Capital’s annual analysis of corporate performance, the JUST 100, is a comprehensive ranking of the largest public companies in the U.S. on issues of importance to key stakeholder groups – workers, customers, communities, the environment, and shareholders – as well as to the American public, which the ESG researcher polls annually to weight the categories which its 241 individual ESG data points roll up to.
ESG rankings and the underlying data rely on company reporting, and this year there has been “a large increase in disclosure across many underlying data points,” according to Just Capital, as more companies face more pressure from regulators and shareholders, and vie for a larger share of the institutional and individual ESG investor class.
Here are a few of the highlights from this year’s JUST 100 list, which speak not only to what factors lead to ESG outperformance, but also where the American public is on major societal issues in 2022, and where ESG research remains still very much a work in progress as far as its ability to fully define a “just” business.
Top ESG companies are 5 times as large as the rest
Is bigger better?
The JUST 100 is certainly tilted to the biggest of the big. Ranking a majority of the Russell 1000 Index universe of large-cap U.S. companies, the companies that make the top 100 have 5.7 times the average market capitalization of their non-JUST 100 peers –$181 billion versus $31.5 billion. They also have 3 times the average global employment size of their non-JUST 100 peers — 85,917 versus 27,970.
The top 10 in 2022 are, no surprise, mostly from among the largest technology companies in the U.S., led by 2022 No. 1 company Alphabet, which bumped Microsoft from the top spot in the ranking. The only non tech-focused company in the top 10 is Bank of America.
Some market pundits see a correlation between the rise of the ESG-focused C-suite and the lack of leadership from government, and lack of faith in politicians from the public. Whittaker doesn’t see the situation in these either-or terms.
“The reason why Paul Tudor Jones [the billionaire hedge fund co-founder of Just Capital] got behind this was because he felt the private sector can and should do more, but it’s not a question of abdication,” Whittaker said. “It’s a question of how best to address major societal challenges. Is it best left to government or the private sector, or some combination of both? The private sector must play a role. … businesses are being judged and success driven not simply by the old calculus of shareholder value.”
The biggest companies are also the most likely to face public and government scrutiny.
The higher stakes for mega-cap stocks
“The bigger companies are in the spotlight more and face more pressure to lead,” Whittaker said. “And their CEOs are more vocal about what they are doing. … The stakes seem to be higher for them.”
Big companies are also more likely to be responsible for a significant share of ESG issues. While the top 100 companies in the ranking score higher on recycling, renewable energy usage, carbon reporting and business travel emissions, overall they are the biggest emitters — 2.4 million more metric tons of CO2 (Scope 1 and 2) than their Russell 1000 peers.
“If you are interested in big companies reducing emissions, those that have the opportunity to reduce emissions the most are the biggest emitters,” Whittaker said.
This culpability logic translates across other ESG metrics. “Those who employ the most low-wage workers have the most opportunity to do more on low-wage workers,” he said.
In 2019, JPMorgan (No. 28 on this year’s list) CEO Jamie Dimon turned in one of his worst public performances when California congresswoman Katie Porter grilled him over paying some bank tellers less than a living wage. JPMorgan has since increased its minimum wage, and Dimon focused on the issue of a living wage and a higher federal minimum wage in his 2020 annual letter to shareholders.
Bank of America, which took JPMorgan’s place as the only bank in the top 10 this year, recently raised its minimum wage to $21 and on Tuesday announced it is slashing overdraft fees, which are a financial drain on lower-income individuals and have been a recent target of Senator Elizabeth Warren.
The largest companies also have the resources and systems to disclose more information, and disclosure becomes a proxy for ESG when they are disclosing on pay equity, and on issues like renewable energy investment and climate.
The companies that tend to outperform on ESG, led by tech, can afford to have departments and staff whose job is sustainability. “A smaller company may have one person,” said Levy, who manages funds for Trillium which also invest in small-cap companies.
“More even than what they are doing is what they are reporting on, because anyone trying to measure ESG, including ourselves, we are beholden to the information available to us,” Levy said. “And that’s what they are publishing in glossy sustainability reports. Those with the resources to put out the most comprehensive, prettiest data-filled reports will score best,” she said.
Levy said her top positions at Trillium are the big tech companies, but it’s not just because of ESG marketing. “They have the budget and staff to be doing some innovative things,” she said. “Setting the roadmap for other companies to follow.”
As regulators including the Securities and Exchange Commission under new chief Gary Gensler push for even more disclosure on climate and the workforce, Levy says new regulation should help to somewhat level the playing field among large and small companies when it comes to reporting.
“Are they perfect? No, but they do have a lot to offer. These mega-cap techs stocks really help set the market for renewables and helped bring solar costs down buying power purchase agreements at scale. It’s a net benefit the mega-cap techs provided now paving the way for small companies,” Levy said.
Not all mega-cap tech stocks, though, are on the right side of the ESG divide in 2022. One, in particular, has fallen far in the JUST 100 rankings.
Can any ESG investor own Facebook?
In 2021, Meta Platforms (formerly Facebook) was No. 21 on the JUST 100 list. This year? Not even in the top 100. Or 200. Or 600. Meta’s 2022 rank is No. 712, a fall of 691 places year-over-year. Its fall from grace in the JUST 100 is an example of how ESG methodologies remain imperfect. Or as Just Capital explained, “Meta’s ranking has been adjusted to reflect unique and extraordinary actions that are not adequately captured in the model.”
The downgrade didn’t come out of nowhere. Last year, even as its methodology ranked Facebook at No. 21, it placed the company under Review as a result of news about the spread of misinformation, hate speech, and other discriminatory and incendiary content on its platforms.
Now, “given the growing evidence and internal documentation that suggests that the company was aware of these issues but failed to address them,” Just made the decision to place Meta in the bottom quartile of its rankings, 712 out of 954 companies, and by far the largest drop among companies on the list.
This doesn’t capture how well Facebook does on many ESG metrics — No. 2 in the tech industry on worker data (first overall on wages); No. 1 among tech companies in the environment, having already achieved net-zero emissions within its own operations and on its way to being water positive; and No. 2 in the communities category — among only two internet companies to sign a business pledge to employ previously incarcerated individuals (in all, only 26 out of the 954 companies ranked have signed the Fair Chance Business Pledge.) And it’s one of only two internet firms to have a formal program to recruit and mentor veterans.
“It’s a really tough one,” Whittaker said. “On pure performance metrics, they do well. But capturing a lot of data isn’t always enough to capture the totality of a company, he said. “There is lots of controversy surrounding Meta … they are obviously struggling with it too,” he said.
Just’s board and research staff ultimately have to question whether the model is fully capturing a unique situation, “and with Meta, we felt like it wasn’t,” he added.
On the close to 40% of the JUST ranking model that is weighted to worker issues, Meta is a leader, but it’s not enough. “If we have this massive controversy on an issue of great societal importance, how does it get reflected? Do we really feel like the extreme situation is reflected in the model?” Whittaker asked. “Do they have to get that one thing right over all those other things? We felt there was enough reason to say, ‘we are not sure yet.'”
For Trillium’s Levy, the Meta situation has become less complicated as an ESG investor. She sees it as a more straightforward failure on the pillar of governance. “This is a company we have talked about a lot,” she said. “We do not own Meta now and have not for at least a year,” she said.
Trillium had tried the shareholder advocacy route when it did own Facebook, and had filed some resolutions, but a part of the reason it chose to exit the stock is because of CEO and founder Mark Zuckerberg’s controlling shareholder stake. “Engaging is what we do,” Levy said. “We try to help them become better companies, but it got to the point where we realized the controlling shareholder had no interest in making any improvements,” she said. “Issues that are squishier you can’t just evaluate on a spreadsheet, but within a broader context, we felt like no matter what we did, no matter what dialogue we had, the company was not open to rethinking the core tenets of business and the controlling shareholder did not need to listen to mere shareholders such as ourselves.”
Facebook did not immediately respond to a request for comment on the JUST 100 ranking published on Tuesday morning.
Why Exxon Mobil is the No. 1 company in the oil and gas sector
The nearly 40% of the JUST 100 methodology that is weighted to worker issues would make Meta look pretty good if it were just ranked on the math, but instead, it’s Exxon Mobil that is among the surprise ESG leaders in 2022.
In fact, between the 39% weighting for worker issues and the 20% weight to the communities data that includes local job creation, Exxon Mobil is able to break into the top 100 even as it has long been seen as a laggard — even within its own oil & gas sector — on climate. In 2022, the environment category represented 10% of the total JUST 100 score.
Each year Just Capital conducts polling to capture the issues being prioritized by the American public, and it has shifted, with Americans more likely than ever before to prioritize issues related to workers including a living wage and local job creation.
“What stood out to me was energy companies, the oil and gas companies and Exxon No. 1,” Whittaker said. “I looked at that and said, ‘wow, here’s a company you would not think of as a ‘just’ company … intuitively, people would not think that and there it is.”
This was as much a function of the fact that ESG models are still evolving as Meta’s booting from the top 100.
“Climate is an important issue, but not the only issue,” Whittaker said.
Scoring well on pay; and well-being of workers beyond what is required by law; and benefits; and diversity, equity and inclusion; and workforce career development, all help Exxon Mobil and other energy companies that some ESG investors wouldn’t get any closer to in a portfolio than Meta. And that includes Levy, and her view is a reminder that the ESG industry still remains a far way off from a standardized industry process of evaluation.
“We’ve been doing ESG for more than 40 years and we started in this world with what we don’t want to invest in, and we don’t want to invest in companies harming people,” she said. “For me, Exxon Mobil, making climate incompatible with human life, is not a company I want to invest in. Looking out at the policy and regulatory framework and what are the risks, from our perspective, a company like Exxon is not touchable.”