Crypto

ESG firm raises eyebrows for rating collapsed crypto giant FTX higher on governance than Exxon Mobil

AI-based ESG rating firm Truvalue Labs has defended its methodology after giving collapsed crypto giant FTX a higher governance score than Exxon Mobil.

A screenshot of an ESG analysis for FTX — by FactSet-owned Truvalue Labs — went viral on Nov. 13, showing Sam Bankman-Fried’s beleaguered FTX scored higher for “Leadership & Governance.” than oil giant Exxon Mobil. FTX filed for bankruptcy on November 11.

The crypto exchange, which moved its headquarters from Hong Kong to the Bahamas last year, was given a governance score of 50 out of 100 by Truvalue, despite having just two directors on its board. administration, one of whom was founder Bankman-Fried.

It scored 12 points higher for governance than Exxon Mobil, which has an 11-person board and has been operating for more than 135 years.

The image was posted on popular online forum WallStreetBets on the Reddit platform before taking off on Twitter.


FactSet, a $16.4 billion data and analytics provider, said Financial news that the snapshot comparing FTX and Exxon Mobil “showed a limited view of Truvalue’s long-term scores” and was “cropped to omit” that the crypto firm had received a “lagging” overall score, the worst possible ESG ranking .

“FactSet’s Truvalue ESG Scores take a scalable, AI-powered approach to scoring company ESG behavior by analyzing daily insights from over 100,000 credible third-party sources for unparalleled transparency of company ESG performance. “said the data and analytics provider. “Truvalue ESG scores have consistently demonstrated alpha with a proven, award-winning methodology that does not rely on individual human judgment.

“The comparison shared on Twitter displayed a limited view of Truvalue long-term scores available to FactSet Workstation users.”

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ESG skeptics misused the incident as an opportunity to cast the green ratings industry as a “scam,” adding fuel to an anti-wake-up backlash by Republican lawmakers in the United States.

Roger Severino, a US attorney and former director of the Department of Health and Human Services under President Donald Trump, tweeted Nov. 14: “It begs the question of who the biggest frauds are – groups like FTX or racketeers. of ESG who cover as long as they recite woke pieties and donate to liberal non-profit organizations that, you guessed it, influence ESG ratings.

Chip Roy, a Republican congressman who won re-election in the 2022 midterm elections, tweeted Nov. 15 that the comparison between FTX and Exxon Mobil was “further proof that 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 expressed his disdain for ESG, Tweeter earlier this year that he had “been weaponized by fake social justice warriors” after Tesla was ousted from the S&P 500 ESG index, while Exxon Mobil was ranked in the top 10.

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Truvalue’s ESG scores, which are based on five key areas including environment and human capital, are based on a framework defined by an independent third-party ESG organization, the Sustainability Accounting Standards Board.

Despite the fact that the crypto industry remains largely unregulated, its carbon footprint has generally been the biggest brand against it from an ESG perspective. Mining cryptocurrencies requires large amounts of electricity, which is often generated by coal. But with the explosion of FTX, governance issues are now fully in the spotlight.

When asked why FTX still had a score of 50, which is neutral, for leadership and governance, FactSet said that was only the case when looking at its “analytics scores.” These are “slower, rating-like scores” that integrate information over time to create “a long-term view of company behavior.”

Truvalue’s “Pulse Scores,” which respond to short-term events that would impact a company’s ESG score, reflected the deteriorating situation at FTX, FactSet said.

The crypto firm’s Pulse Score for Governance was 50 in September, but it was downgraded on October 17 after Truvalue’s AI scoring system identified an article indicating that Bankman-Fried was the subject of of an investigation by Texas regulators. It was downgraded again on November 11 when news of the company filing for chapter 11 broken.

Over the past week, FTX’s Pulse Score has fallen into the 28-33 range, placing it in “deeply negative territory”.

For business ethics – one of the factors determining leadership and 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 ratings business, produces ESG ratings for private companies, but not in the crypto space, so did not cover FTX.

Sercan Soylu, director of ESG research at Sustainalytics, said the company currently covers eight pure-play crypto companies, 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 Nasdaq, it is an environmental “lag” mainly due to having weaker policies in place to manage these risks and reduce greenhouse gas emissions, Soylu said. .

On the governance side, which takes into account issues of business ethics, compliance and corruption, it is an “average” performance compared to the peer group.

In contrast, Exxon Mobil and Shell are rated “high risk,” 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 is by default much higher than that of a crypto company.

However, Soylu said there is no doubt that Coinbase is weaker from a corporate governance perspective than large companies such as Exxon Mobil or Shell, which are “leaders” – not only in their own sector, but in general.

“I can’t say that there is an absolute good or bad in this profession. It all depends on the model you’re using — the underlying parameters and the constraints. In the end, this should make good sense.

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To contact the author of this story with comments or news, email Kristen McGachey

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