A new study finds that companies prioritizing good environmental, social, and governance (ESG) metrics pollute just as much as companies that do not.
Key Details
- Singapore-based financial services company Scientific Beta reports that investing in ESG indexes does not necessarily correlate with having a low-carbon investment portfolio.
- A low correlation between carbon intensity and ESG scores results in most ESG gains being wiped out by partial weight determinants and ESG objectives.
- Researchers also noted that ESG portfolios are less green than comparable capitalization-weighted indexes.
- “The two objectives are unrelated and are therefore hard for investors to achieve simultaneously,” says the study.
Why It’s Important
ESG has become one of the most powerful and talked-about buzzwords of the past year, with much political controversy and disagreement arising regarding its efficacy and responsibility. The majority of the business world has embraced ESG as a means of addressing ongoing climate issues, with large investment companies like BlackRock promoting the importance of social responsibility—a practice that has come to be known as “stakeholder capitalism.”
ESG funds and indexes have seen strong demands due to their claims of promoting “sustainability” and saw net inflows of $49 billion in the first half of 2023, The Financial Times reports.
The Problem
However, the term ESG and its implications have become a political hot potato in the leadup to the upcoming 2024 Presidential Election. Florida Governor Ron DeSantis partially made his name by challenging “wokeness” in Florida, which involved publicly castigating BlackRock for gambling state retirement funds on ESG Indexes, as most key ESG indexes underperformed last year.
President Joe Biden used the first veto of his administration in March to block a bipartisan anti-ESG bill that worked through both houses of Congress, which would have struck down labor department rules supporting it. Republicans are not alone in their criticisms. Rival asset manager Vanguard similarly has its own critiques of ESG and says it is not smart investing. The term has become so toxic that BlackRock has stopped using the term ESG.
As we previously reported, anti-ESG indexes have performed very well in the past year, peaking at $376 million in the third quarter of 2022.
Notable Quote
“ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings. It doesn’t seem that people have actually looked at [the correlations]. They are surprisingly low. The carbon intensity reduction of green [i.e., low carbon intensity] portfolios can be effectively canceled out by adding ESG objectives,” says Scientific Beta research director Felix Goltz.