AI-driven ESG ratings firm Truvalue Labs has defended its methodology after awarding collapsed crypto giant FTX a higher score for governance than Exxon Mobil.
A screenshot of an ESG analysis for FTX — by FactSet-owned Truvalue Labs — went viral on 13 November, showing Sam Bankman-Fried’s embattled FTX scoring higher for ‘Leadership & Governance’ than oil giant Exxon Mobil. FTX filed for bankruptcy on 11 November.
The crypto exchange, which moved its headquarters from Hong Kong to the Bahamas last year, was given a score of 50 for governance out of 100 by Truvalue, despite having just two directors on its board, one of whom was founder Bankman-Fried.
It scored 12 points higher for governance than Exxon Mobil, which has an 11-strong board and has been operating for more than 135 years.
The image was posted on the popular online forum WallStreetBets on the Reddit platform before taking off on Twitter.
FactSet, a $16.4bn data and analytics provider, told Financial News that the snapshot comparing FTX and Exxon Mobil “displayed a limited view of Truvalue’s long-term scores” and was “cropped to omit” that the crypto company had been given a “laggard” score overall, the worst possible ESG ranking.
“FactSet’s Truvalue ESG scores take a scalable, AI-powered approach to scoring company ESG behaviour by analysing daily information from over 100,000 credible, third-party sources for unrivalled transparency into company ESG performance,” the data and analytics provider said. “Truvalue ESG scores have consistently demonstrated alpha with a proven, award-winning methodology not reliant on individual human judgment.
“The comparison shared on Twitter displayed a limited view of Truvalue’s long-term scores available to FactSet Workstation users.”
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ESG-sceptics have hijacked the incident as an opportunity to write off the green ratings industry as a “scam,” adding fuel to an anti-woke backlash by Republican lawmakers in the US.
Roger Severino, a US attorney and former director of the Department of Health and Human Services under president Donald Trump, tweeted on 14 November: “Begs the question as to who are the bigger frauds — groups like FTX, or the ESG racketeers that cover for them so long as they recite woke pieties and donate to liberal non-profits that, you guessed it, influence ESG ratings.”
Chip Roy, a Republican member of Congress who was re-elected in the 2022 midterm elections, tweeted on 15 November that the FTX and Exxon Mobil comparison was “further proof ESG scores are a scam and should be dismantled”.
Twitter owner Elon Musk also responded to the original Reddit post, which claims “ESG ratings are all a fraud”, with “Yup”.
Musk has been vocal about his disdain for ESG, tweeting earlier this year that it had “been weaponised by phoney social justice warriors” after Tesla was ousted from the S&P 500 ESG Index, while Exxon Mobil was rated in the top 10.
READ Binance policy head tells MPs: ‘We didn’t cause FTX crisis’
Truvalue’s ESG scores, which are based on five key areas, including environment and human capital, are based on a framework defined by independent, third-party ESG organisation the Sustainability Accounting Standards Board.
Despite the fact the crypto industry remains largely unregulated, its carbon footprint has typically been the biggest mark against it from an ESG perspective. Mining cryptocurrencies requires vast amounts of electricity, which is often coal-generated. But with the blow-up of FTX, governance issues are now fully in the spotlight.
Asked why FTX still had a score of 50, which is neutral, for Leadership & Governance, FactSet said this is only the case when looking at its ‘Insight Scores’. These are “slower-moving scores, akin to a rating” that incorporate information over time to create “an all-in view of company behaviour over the long-term”.
Truvalue’s ‘Pulse Scores’, which respond to short-term events that would impact a company’s ESG score, have reflected the deteriorating situation at FTX, FactSet said.
The crypto company’s Pulse Score for governance was 50 in September but it was downgraded on 17 October after Truvalue’s AI scoring system identified an article that said Bankman-Fried was under investigation by Texas regulators. It was downgraded again on 11 November when news about the company filing for Chapter 11 broke.
Over the past week, FTX’s Pulse Score has dropped into the 28-33 range, putting it in “profoundly negative territory”.
For Business Ethics — one of the factors in determining Leadership & Governance scores — FTX has a score of 33. Only Gemini Trust has a worse score at 19, while Binance and Coinbase are slightly higher at 36 and 38 respectively. Crypto.com has a Business Ethics score of 47, which was the best of the crypto exchanges tracked by Truvalue.
Sustainalytics, Morningstar’s ESG scoring business, produces ESG ratings for private companies, but not in the crypto space, so did not cover FTX.
Sercan Soylu, ESG research director at Sustainalytics, said the company currently covers eight pure-play crypto firms, including miners such as Voyager Digital, Riot Blockchain and Marathon Digital Holdings.
Coinbase, which is the only crypto exchange it covers, currently has an ESG score of 27.9, a medium-risk rating.
Compared to its peer group, which includes listed exchanges such as the London Stock Exchange and the Nasdaq, it is a “laggard” on the environmental side mainly due to having weaker policies in place for managing those risks and reducing greenhouse gas emissions, Soylu said.
On the governance side, which takes into account business ethics, compliance, and corruption issues, it is an “average” performer compared to the peer group.
Exxon Mobil and Shell are rated ‘high risk’ by contrast, with overall ESG risk ratings of 36.5 and 37.6 respectively. As they are integrated oil and gas companies, their exposure to environmental and social risks are by default much higher than a crypto company’s.
However, Soylu said there is no question Coinbase is weaker from a corporate governance perspective than large-scale companies such as Exxon Mobil or Shell, which are “leaders” — not only in their own industry but generally.
“I can’t say that there is an absolute right or wrong in this business. It all depends on the model you’re using — the underlying parameters and constraints. At the end of the day, it should make common sense.”
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To contact the author of this story with feedback or news, email Kristen McGachey