Tobacco firms harm ESG ratings.
Why Tesla Has a Lower ESG Score Than a Cigarette Company
S&P Global made headlines this month when it gave Tesla, the world’s largest manufacturer of electric cars, a lower environmental, social, and governance score than Philip Morris International, the maker of Marlboro cigarettes.
It’s hard to believe, but it’s true: Tesla, the company that’s leading the charge on electric cars, has a lower ESG score than a cigarette company. In fact, Philip Morris International, the maker of Marlboro cigarettes, has a higher score than Tesla. How is this possible?
ESG ratings are supposed to guide investors towards ethical enterprises, but it seems that Big Tobacco has been able to game the system. Sustainalytics, a widely used ESG ratings tool, gives Tesla a worse score than Altria, one of the largest tobacco producers in the world. And the London Stock Exchange gives British American Tobacco an ESG score of 94—the third highest of any company on the exchange’s top share index—while Tesla earns a middling 65.
The Hazards of Lumping Health and Environmental Issues with Ideological Fads
The contrast between Tesla and cigarette companies highlights the hazards of a movement that lumps pressing health and environmental issues in with ideological fads. Early ESG efforts were laser-focused on “sin stocks”—companies whose core business was deemed immoral—including tobacco. But as ESG investing has ballooned, so has the number of variables used in ESG ratings, which now encompass everything from labor practices and carbon pledges to diversity trainings and human rights. That has created countless opportunities to game the system, experts say, and lets even the most sordid companies score points—and investors—by toeing the progressive line.
“ESG company ratings often measure abstract woke goals that have no rational connection to companies’ actual businesses,” said Boyden Gray & Associates managing partner Jonathan Berry, who sued NASDAQ last year over its diversity requirements for corporate boards. “Companies score ‘points’ mainly by demonstrating their compliance with the latest dogmas issued by the DEI complex.”
The Tobacco Industry’s Embrace of Corporate Progressivism
So why are cigarette companies like Philip Morris International and Altria getting higher ESG scores than Tesla? It may have something to do with the tobacco industry’s embrace of corporate progressivism. Companies like Altria have gone out of their way to emphasize the diversity of their corporate boards and the breadth of their social justice initiatives, from funding minority businesses to promoting transgender women in sports. But Tesla, whose executives are overwhelmingly white men, has resisted that bandwagon, going so far as to fire its top LGBT diversity officer last year.
The “S” in ESG typically includes diversity programs. Philip Morris International, which in 2021 advertised a partnership with “African data scientists,” got a social score of 84 from S&P Global. Tesla got a measly 20.
Cigarettes are the leading cause of preventable death in the United States, killing more people than alcohol, illegal drugs, and car accidents combined. And their supply chain involves a litany of environmental sins: The industry’s carbon footprint is substantial, and even e-cigarettes, marketed as a less harmful alternative to tobacco, can result in serious pollution because they don’t biodegrade. Tobacco farming, which mostly takes place in developing countries, exposes farm workers to hazardous chemicals.
It’s time for ESG ratings to refocus on what really matters: the impact that companies have on the environment and society. Investors should be able to trust that the companies they’re investing in are doing their part to make the world a better place, not just scoring points by toeing the progressive line.
How Big Tobacco is Using ESG to Clean Up Its Image
Smoking kills. It causes deforestation and soil erosion. Tobacco workers are exposed to toxic chemicals, including high doses of nicotine, which can lead to hospitalization. But ESG ratings often mask those effects.
ESG reporting lets tobacco companies promote their corporate social responsibility (CSR) initiatives while obscuring the significant health, economic, and environmental damage they cause.
Some scores, including S&P Global’s, say in fine print that they are sector-specific, which means companies are held to different standards depending on their industry. An unusually green tobacco giant could score better than an electric carmaker with an all-male board, and corporations can earn points merely by setting water reduction targets or using “diverse” suppliers.
Exploiting Progressivism
The paeans to diversity underscore how tobacco, long considered the quintessential sin stock, could exploit ESG to become a more palatable asset, profiting off the progressivism that has swept through C-suites and corporate boards. Most ESG funds exclude tobacco from their portfolios due to its harmful health effects. But cigarette makers are hoping to change that.
Philip Morris International CEO Jacek Olczak told the Financial Times in May that some ESG asset managers had asked his company for one-on-one meetings, signaling a possible rapprochement with tobacco.
“Asset managers will not spend the time on talking with you,” Olczak said, if they don’t plan to “reconsider the exclusion” policy.
That détente is largely due to the rise of smoke-free products, which now account for a third of Philip Morris International’s revenue. But critics say the ESG movement, and the progressive marketing it encourages, have also played a role in legitimizing the cigarette industry.
Marketing to Marginalized Groups
Some rating systems even encourage cigarette makers to market their products to marginalized groups. Altria has a perfect score on the Human Rights Campaign’s Corporate Equality Index, which lets companies earn points by “advertising to LGBTQ consumers.”
In California, tobacco kills almost as many gay and bisexual men as AIDS. LGBT youth nationwide are over twice as likely to smoke as their straight counterparts, and transgender adults smoke at higher rates than any other group.
Big Tobacco’s ESG reports, documents aimed at investors seeking an ethical portfolio, tend to deceive their primary audience, investors, into thinking that tobacco companies can be ‘sustainable.’ ESG reporting lets tobacco companies promote their corporate social responsibility (CSR) initiatives while obscuring the significant health, economic, and environmental damage they cause.
Big Tobacco’s ESG Makeover: A Smoke Screen?
Big tobacco companies like Altria and Philip Morris International have been touting their high ESG (environmental, social, and governance) scores as evidence of their commitment to social justice and sustainability. However, critics argue that these scores may be little more than a smoke screen to placate regulators and investors who are growing impatient with the slow pace of the industry’s transition to a “smoke-free future.”
Corporate Progressivism or a Ploy?
While the ESG juggernaut is relatively new, tobacco’s corporate progressivism is not. When Philip Morris began advertising in gay periodicals in the 1990s, it dismissed critics of the move as bigots opposed to “inclusion.” By the early 2000s, the company was using “Corporate Social Responsibility,” the precursor to ESG, as a prophylaxis against lawsuits, according to a memo from Philip Morris’s then-general counsel Steve Parrish.
ESG ratings may serve a similar purpose today, allowing tobacco companies to avoid the fate of companies like ExxonMobil, whose board directors were ousted by BlackRock, State Street, and Vanguard for being out of step with investors’ climate priorities. However, the clash of values inherent in ESG ratings means that companies like Altria can usually find at least one good number to show investors, even as critics argue that these scores are little more than a ploy.
A Clash of Values
The clash of values inherent in ESG ratings is one reason why these scores vary significantly across different rating agencies. As Todd Henderson, a professor of law and economics at the University of Chicago, notes, “You have to measure the goodness of women on corporate boards and compare it to the badness of killing people. That’s really a question for Plato.”
Even electric car companies like Tesla can wind up with the short end of the stick, as Chevron edged out Tesla in the S&P’s latest ESG ratings. Chevron earned a lower environmental score than Tesla but scored over twice as high on social issues, where the oil titan has flexed its marketing muscle.
As the debate over ESG ratings continues, it remains to be seen whether tobacco companies’ high scores are evidence of genuine progress or little more than a smoke screen.
Thomas McKenna contributed to this report.
Update, 12:32 p.m.: An earlier version of this story incorrectly stated that Philip Morris sold six billion cigarettes last year. The correct number is 600 billion.
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