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ESG investing has a sustainability blindspot: Supply chains

Diane Davis

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By TINGLONG DAI AND CHRISTOPHER S. TANG 5 minute Read

If you own stocks, chances are good you have heard the term ESG. It stands for environmental, social, and governance, and it’s a way to laud corporate leaders who take sustainability—including climate change—and social responsibility seriously, and punish those who do not.

In less than two decades since a United Nations report drew attention to the concept, ESG investing has evolved into a $35 trillion industry. Money managers overseeing one-third of total U.S. assets under management said they used ESG criteria in 2020, and by 2025 global assets managed in portfolios labeled “ESG” are expected to reach $53 trillion.

These investments have gained momentum in part because they cater to investors’ growing desire to have a positive impact on society. By quantifying a company’s actions and outcomes on environmental, social, and governance issues, ESG measures offer investors a way to make informed trading decisions.

However, investors’ trust in ESG funds may be misplaced. As scholars in the field of supply chain management and sustainable operations, we see a major flaw in how rating agencies, such as Bloomberg, MSCI, and Sustainalytics, are measuring companies’ ESG risk: the performance of their supply chains.

The problem with ignoring supply chains

Nearly every company’s operations are backed by a global supply chain that consists of workers, information, and resources. To accurately measure a company’s ESG risks, its end-to-end supply chain operations must be considered.

Our recent examination of ESG measures shows that most ESG rating agencies do not measure companies’ ESG performance from the lens of the global supply chains supporting their operations.

For example, Bloomberg’s ESG measure lists “supply chain” as an item under the “S” (social) pillar. By this measure, supply chains are treated separately from other items, such as carbon emissions, climate change effects, pollutants, and human rights. This means all those items, if not captured in the ambiguous “supply chain” metric, reflect each company’s own actions but not their supply chain partners’.

Even when companies collect their suppliers’ performance, “selective reporting” can arise because there is no unified reporting standard. One recent study found that companies tend to report environmentally responsible suppliers and conceal “bad” suppliers, effectively “greenwashing” their supply chain.

Carbon emissions are another example. Many companies, such as Timberland, have claimed great successes in reducing emissions from their own operations. Yet the emissions from their supply chain partners and customers, known as “Scope 3 emissions,” may remain high. ESG rating agencies have not been able to adequately include Scope 3 emissions because of a lack of data: Only 19% of companies in the manufacturing industry and 22% in the service industry disclose this data.

More broadly, without accounting for a company’s entire supply chain, ESG measures fail to reflect global supply chain networks that today’s big and small companies alike depend on for their day-to-day operations.

Amazon and the third-party-supplier problem

Amazon, for example, is among ESG funds’ largest and favorite holdings. As a company bigger than Walmart in terms of annual sales, Amazon has reported emissions from shipping that are only one-seventh of Walmart’s. But when researchers for two advocacy groups reviewed public data on imports, they found only about 15% of Amazon’s ocean shipments could be tracked.

In addition, Amazon’s figure does not reflect emissions generated by its many third-party sellers and their suppliers who operate outside the U.S. This difference matters: Whereas Walmart’s supply chain relies on a centralized procurement strategy, Amazon’s supply chain is highly decentralized—a large percentage of its revenue comes from third-party suppliers, about 40% of which sell directly from China, which further complicates emissions tracking and reporting.

Another important ESG metric concerns consumer protection. Amazon prides itself as “Earth’s most customer-centric company.” However, when its customers have been injured by products sold by third-party sellers on its platform, Amazon has argued that it should not be held liable for the damage, because it functions as an “online marketplace” matching buyers and sellers. Amazon’s foreign third-party sellers are often not subject to U.S. jurisdiction so can’t be held accountable.

Yet major ESG rating agencies do not appear to reflect the supply chain implication on customer protection when measuring Amazon’s supply chain performance.

For example, in 2020, MSCI, the largest ESG ratings agency, upgraded Amazon’s ESG rating from BB to BBB, reflecting its strength in areas such as corporate governance and data security, despite its consumer liability risk.

These gaps are also concerns for ratings of companies such as 3M, ExxonMobil, and Tesla.

Other countries are adding pressure

Currently there is no unified reporting standard, so different companies may cherry-pick certain ESG performance measures to report in order to boost their sustainability and social ratings.

To improve consistency, the next step would be for ESG rating agencies to redesign their methodology to take into account what may be environmentally harmful and unethical operations across the entire global supply chain. ESG rating agencies could, for example, create incentives for companies to collect and disclose their supply chain partners’ activities, such as Scope 3 emissions.

In June 2021, the German Parliament passed the Supply Chain Due Diligence Act, which will become effective in 2023. Under this new law, large companies based in Germany will be responsible for social and environmental issues arising from their global supply chain networks.

This includes prohibitions on child labor and forced labor, and attention to occupational health and safety throughout the entire supply chain. Those who violate the law face a fine of up to 2% of their annual revenue.

The European Union’s new Sustainable Finance Disclosure Regulation, which went into effect in March 2021, adds pressure in a different way. It requires funds to report details on how they integrate ESG characteristics into their investment decisions. That has led some money managers to drop the phrase “ESG integrated” from some of their assets, Bloomberg reported.

Without similar laws in the U.S., we believe ESG rating agencies could fill an important gap. To be sure, surveying a company’s entire supply chain’s ESG performance is far more complex. Yet by tying all the ESG dimensions to a company’s supply chain end-to-end operations, rating agencies can nudge corporate leaders to be responsible for actions across their supply chains that would otherwise be kept in the dark.


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Technology & Innovation

The Download: Trump’s potential climate impact, and the end of cheap helium

Diane Davis

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""

This is today’s edition of The Download, our weekday newsletter that provides a daily dose of what’s going on in the world of technology.

Trump wants to unravel Biden’s landmark climate law. Here is what’s most at risk.

President Joe Biden’s crowning legislative achievement was enacting the Inflation Reduction Act, easily the nation’s largest investment into addressing the rising dangers of climate change. 

Yet Donald Trump’s advisors and associates have clearly indicated that dismantling the landmark law would sit at the top of the Republican front-runner’s to-do list should he win the presidential election. 

If he succeeds, it could stall the nation’s shift to cleaner industries and stunt efforts to cut the greenhouse-gas pollution warming the planet. The IRA’s tax credits for EVs and clean power projects appear especially vulnerable. But lots of other provisions could also come under attack. Read the full story. 

—James Temple

The era of cheap helium is over—and that’s already causing problems

Helium is excellent at conducting heat. And at temperatures close to absolute zero, at which most other materials would freeze solid, helium remains a liquid. That makes it a perfect refrigerant for anything that must be kept very cold.

Liquid helium is therefore essential to any technology that uses superconducting magnets, including MRI scanners and some fusion reactors. Helium also cools particle accelerators, quantum computers, and the infrared detectors on the James Webb Space Telescope. 

“It’s a critical element for the future,” says Richard Clarke, a UK-based helium resources consultant. However, it’s also played a critical role throughout the history of technology development, while remaining in tight supply. 

As part of MIT technology Review’s 125th anniversary series, we looked back at our coverage of how helium became such an important resource, and considered how demand might change in the future. Read the full story.

—Amy Nordrum

How Antarctica’s history of isolation is ending—thanks to Starlink

“This is one of the least visited places on planet Earth and I got to open the door,” Matty Jordan, a construction specialist at New Zealand’s Scott Base in Antarctica, wrote in the caption to the video he posted to Instagram and TikTok in October 2023. 

In the video, he guides viewers through the hut, pointing out where the men of Ernest Shackleton’s 1907 expedition lived and worked. 

The video has racked up millions of views from all over the world. It’s also kind of a miracle: until very recently, those who lived and worked on Antarctic bases had no hope of communicating so readily with the outside world. 

That’s starting to change, thanks to Starlink, the satellite constellation developed by Elon Musk’s company SpaceX to service the world with high-speed broadband internet. Read the full story. 

—Allegra Rosenberg

Wikimedia’s CTO: In the age of AI, human contributors still matter

Selena Deckelmann is the chief product and technology officer at the Wikimedia Foundation, the nonprofit that hosts and manages Wikipedia.

There she not only guides one of the most turned-to sources of information in the world but serves a vast community of “Wikipedians,” the hundreds of thousands of real-life individuals who spend their free time writing, editing, and discussing entries—in more than 300 languages—to make Wikipedia what it is today. 

It is undeniable that technological advances and cultural shifts have transformed our online universe over the years—especially with the recent surge in AI-generated content—but Deckelmann still isn’t afraid of people on the internet. She believes they are its future. Read the full story.

—Rebecca Ackermann 

The two stories above are from the next issue of MIT technology Review, all about hidden worlds. It’s set to go live on Wednesday—subscribe now to get your copy!

The must-reads

I’ve combed the internet to find you today’s most fun/important/scary/fascinating stories about technology.

1 The Supreme Court will decide whether states can control social media 
It’ll start hearing arguments today about whether laws aimed at controlling online platforms in Texas and Florida are constitutional. (WP $)
Here’s what you need to know. (NYT $)
Texas’s law is dangerous. Striking it down could be even worse. (The Atlantic $)

2 Celebrities are being ‘deepfaked’ for adverts
AI-generated videos have them endorsing and promoting things they’ve never even heard of. (BBC)
+ These companies show why the next AI wave won’t revolve around chatbots. (Fast Company)

3 Inside TikTok’s live money-making machine
Live streaming can be hugely lucrative—for both the creator and TikTok itself—but there’s a dark side too. (ABC)
+ Influencers are getting younger and younger. (NBC)

4 A vending machine was secretly scanning undergrads’ faces
As privacy violations go, this is a pretty insidious and unnecessary one. (Ars Technica)
Computer scientists designing the future can’t agree on what privacy means. (MIT technology Review)

5 China is set to dominate the future of electric cars 
Thanks, at least partly, to years of careful investment and planning by its government. (Insider $)
Why the world’s biggest EV maker is getting into shipping. (MIT technology Review)

6 People are reporting cracks in their Apple Vision Pros
Bad news about these headsets just keeps on coming. (Engadget)
Apple is exploring developing even more wearable devices. (Bloomberg $)

7 Digitally resurrecting your loved ones might be bad for you
Researchers claim it could create unhealthy dependence on the technology. (New Scientist $)
technology that lets us “speak” to our dead relatives has arrived. Are we ready? (MIT technology Review)

8 Could you endure living on Mars? 
Physical concerns aside, it’d wreak havoc on most people’s minds. (NYT $)
These scientists live like astronauts without leaving Earth. (MIT technology Review)

9 A man allegedly made $1.8 million eavesdropping on his wife’s calls 
US regulators claim he traded on confidential information he overheard during her remote meetings. (The Guardian)

10 Meet the man whose job is to keep an ice cream factory cool ????
Engineering challenges don’t come much more delicious than this. (IEEE Spectrum)

Quote of the day

“I understand that SpaceX is possibly withholding broadband internet services in and around Taiwan — possibly in breach of SpaceX’s contractual obligations with the U.S. government.”

—Republican Representative Mike Gallagher makes an explosive claim in a letter to Elon Musk, CNBC reports. 

The big story

ChatGPT is about to revolutionize the economy. We need to decide what that looks like.

""

STEPHANIE ARNETT/MITTR

March 2023

Whether it’s based on hallucinatory beliefs or not, a gold rush has started over the last several months to make money from generative AI models like ChatGPT.

You can practically hear the shrieks from corner offices around the world: “What is our ChatGPT play? How do we make money off this?”

But while companies and executives want to cash in, the likely impact of generative AI on workers and the economy on the whole is far less obvious.

Will ChatGPT make the already troubling income and wealth inequality in the US and many other countries even worse, or could it in fact provide a much-needed boost to productivity? Read the full story.

—David Rotman

We can still have nice things

A place for comfort, fun and distraction to brighten up your day. (Got any ideas? Drop me a line or tweet ’em at me.)

+ If you want to be happy, fill your days with ‘firsts’
+ May these chatty cats bless your morning. 
+ Please, don’t make tea in an air fryer.
+ This writing exercise could help you to better understand what you want from life.


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How Antarctica’s history of isolation is ending—thanks to Starlink

Diane Davis

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a smiling person in a t-shirt types at a telex

Helpful hams and secret codes

By 1957,Admiral Byrd was recognized as the world’s foremost expert in Antarctic exploration and was leading America’s Operation Deep Freeze, a mission to build a permanent American presence on the continent. The US Naval Construction Battalions, known as the Seabees, were deployed to build McMurdo Station on the solid ground of Ross Island, close to the first hut built by Captain Robert Scott in 1901. 

Deep Freeze brought a massive military presence to Antarctica, including the most complex and advanced communications array the Navy could muster. Still, men who wanted to speak to loved ones at home had limited options. Physical mail could come and go on ships a few times a year, or they could send expensive telegrams over wireless—limited to 100 or 200 words per month each way. At least these methods were private, unlike the personal communications over radio on Byrd’s expedition, which everyone else could listen in to by default.

In the face of these limitations, another option soon became popular among the Navy men. The licensed operators of McMurdo’s amateur (ham) station were assisted by hams back at home. Seabees would call from McMurdo to a ham in America, who would patch them straight through to their destination through the US phone system, free of charge. 

Some of these helpful hams became legendary. Jules Madey and his brother John, two New Jersey teenagers with the call sign K2KGJ, had built a 110-foot-tall radio tower in their backyard, with a transmitter that was more than capable of communicating to and from McMurdo Sound. 

To save money, a code known as “WYSSA” offered a broad variety of set phrases for common topics. WYSSA itself stood for “All my love, darling.”

From McMurdo, the South Pole, and the fifth Little America base on the Ross Ice Shelf, ham operators could ring Jules at nearly any time of day or night, and he’d connect them to home. Jules became an Antarctic celebrity and icon. A few of the engaged couples he helped to link up even invited him and his brother to their weddings, after the men returned from their tours of duty in Antarctica. Many Deep Freeze men still remembered the Madey brothers decades later. 

In the early 1960s, continued Deep Freeze operations, including support ships, were improving communication across American outposts in Antarctica. Bigger antennas, more powerful receivers and transmitters, and improvements to ground-to-air communication systems were installed, shoring up the capacity for scientific activity, transport, and construction.  

Around this time, the Australian National Antarctic Research Expeditions were improving their communications capacity as well. Like other Antarctic programs, they used telex machines, sending text out over radio waves to link up with a phone-line-based system on land. Telex, a predecessor to fax technology, text messaging, and email, was in use from the 1960s onwards as an alternative to Morse code and voice over HF and VHF radio. On the other side of the line, a terminal would receive the text and print it out.

The Australian National Antarctic Research Expeditions sent text over radio waves and developed a special code known as “WYSSA” to save money on the expensive telex rates.

MALCOLM MACFARLANE ©ANTARCTICA NEW ZEALAND PICTORIAL COLLECTION

In order to save money on the expensive per-word rates, a special code known as “WYSSA” (pronounced, in an Australian accent, “whizzer”) was constructed. This creative solution became legendary in Antarctic history. WYSSA itself stood for “All my love, darling,” and the code offered a broad variety of predetermined phrases for common topics, from the inconveniences of Antarctic life (YAYIR—“Fine snow has penetrated through small crevices in the huts”) to affectionate sentiments (YAAHY—“Longing to hear from you again, darling”) and personal updates (YIGUM—“I have grown a beard which is awful”). 

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Tackling long-haul diseases | MIT Technology Review

Diane Davis

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""

Tal, who has been obsessed with infectious disease since losing an uncle to HIV/AIDS and a cousin to meningococcal meningitis, wondered what this striking diversity could reveal about our immune response to infection. According to one hypothesis, the wide array of these receptors is the result of an evolutionary arms race between disease-causing microbes and the immune system. Think of the receptor as a lock, and the “Nothing to see here” message as a key. Pathogens might evolve to produce their own chemical mimics of this key, effectively hiding from the immune system in plain sight. In response, the human population has developed a wide range of locks to frustrate any given impostor key. 

Wanting to test this hypothesis, Tal found herself walking the halls of Stanford, asking colleagues, “Who’s got a cool bug?” Someone gave her Borrelia burgdorferi, the bacterium that causes Lyme disease. Previous research from Tal’s collaborator Jenifer Coburn, a microbiologist now at the Medical College of Wisconsin, had established that Lyme bacteria sport a special protein crucial for establishing a lasting infection. Knock this protein out, and the immune system swiftly overwhelms the bugs. The big question, however, was what made this protein so essential. So Tal used what’s known as a high-affinity probe as bait—and caught the Borrelia’s mimic of our “Don’t eat me” signal binding to it. In other words, she confirmed that the bacteria’s sneakyprotein was, as predicted, a close match for a healthy cell’s signal.  

Sex differences in Lyme infection

Until then, Tal says, she had never given Lyme disease much thought. But the more she learned, the more disturbed she grew. Even after timely antibiotic treatment, roughly 10% of all Lyme patients go on to develop chronic symptoms that can include crushing pain, debilitating fatigue, and cognitive changes that make basic tasks a struggle.  

This confocal micrograph depicts Borrelia burgdorferi bacteria, which cause Lyme disease when transmitted to humans by ticks. These Borrelia were genetically engineered to produce a green fluorescent protein.

COURTESY OF THE TAL RESEARCH GROUP

Perhaps even more alarming than the disease has been the medical community’s response to it. “I realized that there’s this public health debacle around Lyme, and it’s, for lack of a better word, obscene,” Tal says. Chronic Lyme patients skew female, and for decades, clinicians have dismissed their symptoms as signs of mental illness. The medical establishment has “done nothing but call them crazy,” Tal says, “instead of admitting that they just don’t understand what’s going on.” 

Today, there is no objective way to diagnose chronic Lyme, and no medically accepted therapy. For some patients, lengthy treatments with high doses of antibiotics can ease symptoms, but these come with their own serious risks. (They can, for example, damage the microbiome, leading to significant negative effects on health.) And because the antibiotic used currently only prevents bacteria from replicating, Tal notes, it’s up to the immune system to actually kill off the invaders. If immune cells can’t tell friend from foe, the utility of antibiotics may be limited. 

Chronic Lyme patients skew female, and for decades, the medical establishment has “done nothing but call them crazy,” Tal says, “instead of admitting that they just don’t understand what’s going on.”

For Tal, these revelations were electrifying. She dove into the immunology of Lyme disease, focusing in particular on sex differences. In one mouse experiment, she discovered that Lyme bacteria “completely disfigured” the uterus. Yet after delving through decades of Lyme research, she could find only one other study that even documented uterine infection. 

This shortfall mirrors larger problems in medical research. “We’ve let men dictate the direction of research funding for so long,” Tal says. Traditionally, studies focused on male subjects, and a 1977 FDA policy barred women from participating in most clinical trials in the US in the wake of birth defects caused by thalidomide. It wasn’t until 1993 that federal law required studies to include women and minorities. This, coupled with other sex- and gender-based medical biases, means that many female-dominated diseases remain under-researched. “So much of this research is being done on males, male mice—male, male, male,” Tal says. “And I’m like, no.” 

Tal suspects that the sex disparities seen in chronic Lyme and other pathogen-­triggered chronic diseases might come down to the fact that men mount a more robust response to acute infection. This no-holds-barred approach is risky—“Your immune system has the power to kill you,” she notes—but it may mean that men, on average, can kill off more viruses or bacteria in the critical first week of infection. After that window closes, the immune system largely settles back down, Tal says. Pathogens that escaped the initial blitz could take up long-term residence in the body, potentially causing persistent symptoms. And women have a higher chance of chronic illness.

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