ESG Part II: Why it’s So Hard

Finally, with Covid fading, and the markets settling, we can return to our ESG series. The last installment in this series was over a year ago, when we introduced the topic and mentioned that we would be looking at specific companies to help define the topic and discuss ESG philosophies. The long time frame between that last post and this one has allowed the market for ESG products to develop further. We have also seen new regulations both in the US and abroad that affect the space, and more data is available regarding performance of such strategies. We will touch on all these items as this series continues.

But today we are going to focus on plant based “meatless meat” company Impossible Foods. Impossible is not public (yet) but its business model is proving very competitive against a company that is public – Beyond Meat (ticker BYND). A major difference between the two is the use of genetically modified ingredients over at Impossible. Beyond Meat eschews such behavior, and is GMO-free. However, taste tests almost consistently reveal that Impossible burgers taste more like meat due to a genetically modified yeast molecule. Scientists working at Impossible tell us that GMO is the wave of the future, and that we cannot reasonably feed the new few billions of people that will be born in the coming years without completely wrecking our environment through the misuse of land.

We have a few clients who are opposed to investing in companies that promote GMO in any way. But what if, when Impossible Foods comes public finally, it becomes apparent that the market much prefers that company’s products to those of Beyond Meat? Then we are looking at an eroding value for BYND and an increasing value for the sinner, Impossible. This is an example of the complexity that investors will navigate while pursuing their individual versions of ESG: is GMO an acceptable tradeoff when considering the “E” portion of ESG?

In fact, this tradeoff is a reminder of a complaint that has surfaced more consistently among ESG practitioners, and that is: there are no standards that define ESG. The concept is up for interpretation. In a clear violation of what I, at least, believe to be a reasonable ESG claim, I read a missive from a mining company claiming that since its product aids the production of electric vehicles, its stock therefore scores well on ESG criteria. However you want to look at it, mining is environmentally destructive, no matter what the product is. We can claim to like lithium better than coal, but the extraction of either one is bad for the environment.

Next up in our series we will explore this last topic further: what companies want you to believe about their ESG credentials, versus what is actually true.