Corporations with high environment, social, and governance (ESG) ratings cause just as much harm to the environment as their peers with low scores, according to research conducted by index provider Scientific Beta and published by the Financial Times on Monday. The study found that ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings.
Felix Goltz, the research director at Scientific Beta, explained that the carbon intensity reduction of green portfolios can be effectively canceled out by adding ESG objectives. In fact, high ESG ratings were more likely to correlate to a larger carbon footprint. When all three metrics (environmental, social, and governance) were considered, the resulting portfolios were less green than the average index weighted by market capitalization.
The researchers discovered that social and governance metrics have nothing to do with a company’s carbon footprint or environmental policies. Metrics such as diversity initiatives and anti-corruption measures do not overlap with pollution controls or resource conservation. Therefore, a high-emitting firm can still receive a high ESG score if it excels in governance or employee satisfaction, even though it may have a significant negative impact on the environment.
Goltz further explained that even the environmental pillar of ESG ratings is unrelated to carbon emissions. Instead, it focuses on more concrete attributes like water use and waste management. This misalignment between ESG metrics and carbon emissions is a concern, as it can lead to misleading assessments of a company’s environmental impact.
Ratings firm MSCI ESG Research, one of the agencies whose ESG ratings were used in Scientific Beta’s research, stated that ESG ratings were not designed to measure a company’s eco-friendliness or its impact on climate change. They are primarily intended to evaluate a company’s resilience to financially material environmental, societal, and governance risks. The environmental pillar considers factors such as future plans to curb carbon emissions, clean technology investments, and the management of nature-related risks.
The problem of misaligned ESG metrics is expected to worsen as new metrics are constantly being added. Investors need to carefully consider which aspects of sustainability they prioritize when building portfolios. They must decide whether they prioritize carbon reduction or a high ESG rating.
ESG, which was once hailed as the corporate solution to the planet’s problems, has faced backlash in the past year. Major industry figures, such as BlackRock CEO Larry Fink, have admitted that the term has been “weaponized.” Fink revealed in January that BlackRock had lost $4 billion in assets under management due to the anti-ESG sentiment. It is evident that the concept of ESG still needs refinement and clear alignment with environmental goals.
In conclusion, high ESG ratings do not necessarily indicate environmental friendliness, and companies with low scores can have a smaller carbon footprint. The current ESG metrics do not adequately measure a company’s impact on climate change. As investors consider sustainability factors, they need to carefully evaluate the trade-off between carbon reduction and a high ESG rating. The concept of ESG is facing criticism and requires further development to become a reliable indicator of a company’s environmental responsibility.
Source link
