Assessing Clean Tech for ‘S’ and ‘G’

The raft of incentives and tax credits associated with the U.S. Inflation Reduction Act have ignited interest in developers and producers of clean tech and other low-carbon solutions. In addition to seeking to identify companies that stand out on their involvement in clean tech, investors may benefit from understanding how these firms varied in their abilities to manage financially-relevant social and governance risks.

Varying management of social and governance risks

We examined 58 companies with at least 50% of their revenues exposed to clean tech (see exhibit below) and some U.S.-based earnings. A comparison of their social- and governance-pillar scores from the MSCI ESG Ratings model showed how risk-management capacities varied across different companies and the Global Industry Classification Standard (GICS®)¹ sectors. We used these findings to address some key questions around clean-tech-oriented companies and understand what the scores signify:

• How are electric-vehicle (EV) producers managing labor and product-safety-related risks? The seven EV companies identified within the consumer discretionary sector had relatively low social pillar scores (an average of 2.2 out of 10), suggesting weak labor and product safety management capacities.

• Are manufacturers of wind turbines and EV charging equipment sufficiently well governed to avoid potential management mishaps? The 25 companies in the industrials sector had one of the largest standard deviations in their governance pillar scores, which ranged from 2.3 to 7.3 out of 10, highlighting a wide variation in capacity to manage these risks.

• Are utilities disclosing sufficient information to judge their ability to retain talent? Variation in disclosures on policies and practices related to utilities’ ability to manage their human capital contributed to a broad range of social pillar scores (1.9 to 7.8 out of 10) among the 10 utilities identified.

Comparing social and governance risk management

How to use the chart: move the slider to set a minimum threshold for revenues earned in the U.S. as of most recent year available. Click on sector names to filter for companies in that sector.

Note: We identified 58 clean tech companies among constituents of the MSCI ACWI Index as of Oct. 26, 2022, by screening for companies that we estimate have more than 50% of their revenues from alternative energy (e.g., wind turbine manufacturing or solar power generation) or energy efficiency (e.g., clean transportation infrastructure or demand-side management), with at least some revenue earned in the U.S. ESG Ratings governance and social pillar scores range from zero to ten, with ten the highest.

Source: MSCI ESG Research.