It’s become fashionable for investors to try to do good at the same time as they do well. Investment in so-called ESG funds—those that take account of environmental, social and governance factors—has doubled in 2020 and now totals around $35 billion. Universities and other endowments have been pressured to divest from all stocks associated with fossil fuels. Some investors argue that this kind of investing will achieve a “more inclusive capitalism” and can even enhance investment returns. But how do you know if your investments will have the desired social impact?

ESG rating agencies supposedly fulfill the need by providing composite scores. These agencies range from specialized firms like Sustainalytics to large index providers such as MSCI . Business is booming, and these agencies are increasingly influential in determining how capital is allocated. The problem is that the scores from different providers disagree dramatically. Moreover, ESG ratings tend to be divorced from considerations of how environmental, social and governance performance can influence future financial results.

ESG raters can’t even agree on how to evaluate these companies when they consider the same attribute such as carbon intensity. Some examples will illustrate how difficult this can be.

Xcel Energy has one of the biggest carbon footprints in the electric utility industry. Xcel ranks poorly because it generates a substantial share of its power from coal. But Xcel is the first U.S. utility committed to going 100% carbon-free by 2050 and is a leader in building wind-generation facilities. Should we refuse to invest because of its carbon emissions, or do we approve of the company because of responsible investments that may ultimately lead to greater profitability?

Another example is Kinder Morgan , a gas pipeline company, which scores poorly for investors who eschew carbon-intensive energy. But natural gas is the cleanest-burning carbon, and to the extent that it can replace coal, environmental goals can be better achieved. And it is far safer to transmit gas through pipelines than by rail or truck.

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