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ESG Ratings won't save the planet


A great quote from the recent HBR thought piece on ESG ratings within funds management. “ESG ratings which underlie ESG fund selection are based on “single materiality” — the impact of the changing world on a company P&L, not the reverse.”

The article is combative, taking aim at SSGA, BlackRock and Vanguard as they build ESG index products based on these ratings. There are some good points (I think) on where the effort should be focussed on setting appropriate boundaries for capitalism (subjective) and letting the market innovate. Neither is easy but at least it will remove some confusion and marketing guff that investing in a low carbon tracker will somehow affect climate change.


Some salient points:


  • Marketing materials of ESG funds often make lofty statements about social or environmental aspirations, but the fine print reveals that the real goal is to assure shareholder profits.

  • In a new climate fund, there is no mention of driving the transition and the fund holdings seem remarkably standard: Exxon, Chevron, and Conoco Phillips are among the fund’s top 100 holdings.

  • ESG funds are based on unregulated ESG ratings. ESG ratings, in turn, are built on comparative rankings of industry peers not on universal standards. This is why fossil fuel companies can have better ESG ratings than makers of electric vehicles.

  • SG ratings are incomplete, mostly unaudited, and often dated. As a result, even those who are responsible for these data have little faith in their accuracy. According to a recent study, more than 70% of executives surveyed across multiple industries and regions reported that they lack confidence in their own non-financial reporting.

I believe that ESG ratings and rankings play a part in the move to a more sustainable future, just don't confuse this with driving actual change within the companies ranked.


Cheers,

Shaun.


Hall Road Investments

ABN 61 621 299 269

T: +61 (0)403 289 937

“Hall Road Investments Pty Ltd is a Corporate Authorised Representative (CAR No. 001279456) of Non Correlated Capital Pty Ltd (AFSL No. 499882). Shaun Parkin is an Authorised Representative (AR No 001279458) of Hall Road Investments Pty Ltd (CAR No. 001279456) and is authorised to provide general advice to wholesale investors”

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