Replicable Analysis And Algorithms – Future Truth ESG By Fighting Greenwashing
Corporations, investors, regulators, and the public want to know if ESG commitments institutions make are truthful – not greenwashed. While the global economy in 2023 faces war in Europe, increasing inflation, rising interest rates, challenging energy markets, and growing political challenges, at the same time, regulators are now actively targeting ESG commitments for greenwashing.
Even now the concept of ESG is being politicized – yet ESG has evolved with and been a part of the professionalization of capital markets for the last 90 years since the collapse of the markets in 1920s when analysts disregarded and did not address governance risks.
Yet tools exist today that can assist corporations, investors, regulators, and the public determine the materiality of greenwashing risks.
Responsible Alpha and Deception And Truth Analysis (D.A.T.A.) demonstrate below – in a stepwise manner – how technology can enable truth telling and determine if commitments may not be accurate.
To demonstrate we will consider the following real life case study of how we and a mutual hedge fund client assessed New Fortress Energy (ticker: NFE). NFE, founded in 2014, is an $8 billion integrated gas-to-power infrastructure company operating globally in two segments: Terminals and Infrastructure, and Ships.
About New Fortress Energy
On NFE’s website under the About section, the company tells you immediately that they are ‘Powered by positive energy’ and that their vision and mission is:
“We want to light the world. Billions of people around the planet lack access to affordable power. Electricity should not be a luxury good.
“As a liquefied natural gas (LNG) company, our mission is to provide capital, expertise and vision to address this problem while also making positive and meaningful impacts on communities and the environment.”
“…access to affordable, reliable, cleaner energy is not a privilege, but a human right…Creating that access – in an environmentally responsible way – is our fundamental mission.”
For a company that transports liquid natural gas from one location to another around the world – a non-sustainable activity – to have such high aspirations is noteworthy.
Yet is the above flowery language supported by their record?
Sustainalytics, the Morningstar Company that rates listed companies based on their ESG performance, ranks NFE in the top 30 percent of NFE’s ‘Construction & Engineering’ peer group, or 99 out of 339 peers. But in Sustainalytics total universe of rated companies, NFE ranks 11,960 out of 15,101, or in the bottom 79% of all companies.
In other words, NFE is ranked by Sustainalytics as a relatively clean shirt in a dirty industry.
A review of Sustainalytics analysis though shows that the primary driver of their ranking is their opinion of the industry in which NFE operates, rather than the specifics of the company itself.
In other words, Sustainalytics’ analysis of NFE is more general than specific, more systematic than unsystematic.
Responsible Alpha is a globally scaled ESG consultancy who are frequently hired by investors to investigate material greenwashing claims at companies. Responsible Alpha’s approach is similar to a private investigations team, and, in fact, they were hired to investigate NFE because of suspicions that NFE might be greenwashing.
The investor hired in collaboration Deception And Truth Analysis (D.A.T.A.) and Responsible Alpha to test this greenwashing claim using the DATAbase tool of pre-scored regulatory filings by U.S. publicly-traded companies since 2008 for each company’s deceptiveness and truthfulness. The following is the time series history of the DATA Score for NFE.
Figure 1: NFE’s historical DATAbase scores.
DATAbase scores range between 100% and +100% with any negative score meaning a document is deceptive, in the aggregate, and any positive score indicating that a document is truthful, in the aggregate.