How Wall Street Is Gaming ESG Scores WealthManagement.comRead More
Impact Investing Forum 2023
London. Dec 05-06, 2023.
(Bloomberg). There are many inconsistencies between money managers’ stated climate goals and the reality of their investments. This statement is not surprising given the amount of reporting on Wall Street greenwashing. However, it is tied to a more nuanced analysis of strategies behind climate-focused funds. Asset managers often talk about how climate data is used to build their ESG portfolios. However, many funds aren’t managed in a way that promotes such an impact. EDHEC academics wrote a 65-page report titled “Doing good or feeling good?” Detecting Climate Investing Greenwashing Related: Fund managers feel heat in the SEC crackdown on overblown ESG labels. These findings are part of a growing body research questioning the climate-related credentials of this rapidly expanding sector of the asset management industry. Separate investigations have been launched by the U.S. and German regulators into misleading investment products that boast of their corporate governance, environmental, and social benefits. Felix Goltz (electronic beta research chair) said that asset managers need to do the right thing in light of recent superstorms, floods, and unprecedented wildfires across the globe. He said that there are very few differences in how climate funds are actually invested relative to market benchmarks such as the Standard & Poor’s 500. Related: Climate Change is Code Red For Humanity: Is ESG Investment code Red for Fiduciaries. Goltz stated that even though managers and investors communicate extensively about how they use climate data to build their portfolios, these data points only represent 12% of the determinants of portfolio stocks weights on an average. This means that 88% is the same as what guides any other non-green investment. Goltz stated that there are many questions about exaggerated claims. The vast majority of funds that claim to adhere to net-zero investment strategies face “large and obvious greenwashing risk.” One of those risks is the temptation for money managers to manipulate the system to get higher scores than actually make a difference. Goltz stated that regulators and money managers should review the investment standards in climate alignment. Fund managers need to do more than display the “green scores” of their portfolios. Instead, they should invest in stocks that provide incentives for companies to take action on climate change. He said that fund managers should push those industries to invest in technologies that can significantly reduce greenhouse gas emissions, not avoid utilities, to promote alignment with climate goals. Goltz stated that this requires “highly targeted, intra-sectoral capital allocation that favors leaders in climate change.” He said that the current system doesn’t reward companies for taking active steps to reduce carbon emissions as much as it rewards them based on non-environmental factors, such as financial results or performance in social and governance criteria that are not related to climate change. To make the green economy possible, we need capital to invest. Goltz stated that money managers are needed to engage with companies in a productive way. Corporate executives won’t see any incentive to make their company greener if they don’t. Goltz stated that the EDHEC study found that fund managers almost always ignore whether a company has improved their climate performance. He said that investors often increase their stakes in shares of companies with poorer climate performance. Goltz stated that portfolio construction must be changed if asset managers are to make a positive impact. He said that the industry uses climate strategies that are very similar to traditional weighted ones. Nine of the 10 largest holdings within the $22.5 billion iShares ESGAware MSCI USA ETF have the same weight as the largest-weighted companies in the S&P 500. Money managers are not likely to have a significant impact on the environment if they pursue climate goals. Goltz stated that while large portfolio-level carbon metric improvement is attractive for product marketing purposes, it is not guaranteed to have any real-world impact. Bloomberg Green publishes a weekly newsletter that focuses on ESG. It provides unique insights into climate-conscious investing and offers unique insight. Contact the author of this article:
Tim Quinson in New York, [email protected]