Good ESG scores don't correlate to low carbon intensity, research finds
Environmental, Social, and Governance (ESG) criteria have engulfed the investment world in a matter of years. Local companies like Hewlett-Packard and Adobe scramble to regularly publicize “social responsibility” data that—according to the Financial Times' Scientific Beta research breakdown—doesn't actually translate to less carbon emissions per revenue unit (go figure).
“ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings,” said Felix Goltz, research director at Scientific Beta. “It doesn’t seem that people have actually looked at [the correlations]. They are surprisingly low.”
“The carbon intensity reduction of green [ie low carbon intensity] portfolios can be effectively cancelled out by adding ESG objectives.”
The findings come amid strong demand for ESG investment, with “sustainable” funds globally attracting net inflows of $49bn in the first half of this year, according to Morningstar, while the rest of the fund industry saw outflows of $9bn.
Goltz and his colleagues looked at 25 different ESG scores from three major providers: Moody’s, MSCI and Refinitiv.
They found that 92 per cent of the reduction in carbon intensity that investors gain by solely weighting stocks for their carbon intensity is lost when ESG scores are added as a partial weight determinant.
Even just using environmental scores, rather than the whole panoply of ESG, “leads to a substantial deterioration in green performance”, they found.
Worse still, mixing social or governance ratings with carbon intensity typically creates portfolios than are less green than the comparable market capitalisation-weighted index, the researchers noted.
This article originally appeared in the Financial Times. Read the whole thing here.
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