Standards for Financial ESG Products Too Lax finews.comStandards for Financial ESG Products Too Lax finews.com
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<> and <> are mentioned in the same breath as ESG strategies in the financial services industry. Finews.com took a look at some ESG investment products and concluded that ESG ratings are inadequate.
Whistle blowers such as Desiree Fixler or Tariq Fancy have been unambiguous in saying asset managers like DWS or U. S-based giant BlackRock engage in <> or <> their sustainability efforts and climate goals.
In other words, investment products with an ESG label or with a climate-change target may comply with sustainability guidelines, but do not have a measurable impact. There is no doubt that serious efforts are being made in the financial sector to put the global economy onto a more sustainable footing and to slash CO2 emissions in accordance with the Paris climate targets.
However it is equally correct to say that the industry is exploiting the ESG and sustainability trend to push its products.
Since the financial industry committed itself to the U. N’s sustainable management and the 2015 Paris Accord’s climate-change goals, the finews.com editorial team has received press releases almost every day announcing the launch of a new ESG or impact product or a financial services company’s net-zero strategy.
Index Sets Tone
finews.com randomly selected three from a stream of products announced over the last few days: an ETF from UBS, <>, Janus Henderson’s <> fund and Graubunden Cantonal Bank’s (GKB) <> fund.
For the UBS ETF, <> means that it is based on MSCI’s ACWI index. This index is intended to support investors in reducing their exposure to climate change and physical climate risks and to seize opportunities linked to the energy transition.
Oil Financiers <>
According to UBS manager Dag Rodewald, the ETF as a portfolio component offers the advantage of limiting CO2 emissions and helping cap the global increase in temperatures at 1.5 degrees Celsius.
The portfolio consists largely of tech stocks such as Apple, Microsoft, Amazon, Alphabet and Facebook, but also financial companies such as J.P. Morgan. In other words, one of the largest financiers of companies in the oil and coal sector, is <>.
The same applies to Facebook, despite there being a major question mark hanging over it when it comes to governance, or to Amazon, where the social component is dubious when it comes to working conditions.
Turned Dark Green by Tech Stocks
Janus Henderson calls its newly launched sustainable technology fund <>. It should therefore be particularly sustainable, which is not immediately apparent from a quick glance at the portfolio.
The largest positions are Microsoft, software stocks Autodesk and Adobe, the graphics card manufacturer Nvidia and the chip manufacturer Taiwan Semiconductor Manufacturing. In Janus Henderson’s Horizon Global Technology Leader Fund, on which the sustainability fund is based, the portfolio looks very similar with a slightly different weighting. After all, there is a larger position in the sustainability fund with shares in Evoqua Water Technologies, a U.S. company with a focus on technology for clean water.
Exclusion Criteria from Last Century
Janus Henderson also bases its sustainability label on exclusion criteria. Companies that cause damage to the environment and society are not included in the fund. In the past, exclusion criteria usually related to arms, alcohol, tobacco and pornography companies. In today’s terms, that means a fund that excludes a landmine manufacturing company, for example, can describe itself as sustainable.
This makes GKB’s new European equity fund ESG-compliant too. Companies making controversial weapons are excluded, GKB says of its product’s ESG rating. This in turn is undertaken by MSCI. The index provider relies on the U.N. Global Compact of the year 2000, a non-binding agreement encouraging companies to pursue a sustainable and socially responsible business policy.
Minimal Entry Barriers
In terms of its portfolio, the GKB’s European equity ESG fund barely differs from its predecessor, which lacked the ESG label. GKB has now consistently expanded this ESG addition to its entire range of funds thanks to MSCI’s ESG rating model.
What emerges from this random selection of products applies to the overwhelming majority of ESG investments: The barriers to asset managers entering the world of sustainability are paper thin. With hindsight, it’s no wonder ESG investing has become the most powerful trend in the financial services industry.
Well Managed Polluters
Rating companies such as MSCI or Sustainalytics enable this. ESG ratings primarily relate to business risks associated with ESG factors.
A company can emit millions of tons of CO2 and still receive an ESG score that qualifies for a sustainability fund because these CO2 emissions do not mean there is the threat of a lower company valuation. In addition, a company’s ESG score is the result of variously weighted ESG factors.
As a result, oil companies such as ExxonMobil or the tobacco multinational Philipp Morris or Coca Cola or Pepsi, whose products cause immense damage to health, achieve decent ESG scores.
Well Managed Polluters
Rating companies such as MSCI or Sustainalytics enable this. ESG ratings primarily relate to business risks associated with ESG factors.
A company can emit millions of tons of CO2 and still receive an ESG score that qualifies for a sustainability fund because these CO2 emissions do not mean there is the threat of a lower company valuation. In addition, a company’s ESG score is the result of variously weighted ESG factors.
As a result, oil companies such as ExxonMobil or the tobacco multinational Philipp Morris or Coca Cola or PepsiCo, whose products cause immense damage to health, achieve decent ESG scores.
Technology = Sustainability?
Investing in technology stocks is probably the easiest way into the world of ESG products. The CO2 emissions of companies such as Facebook, Alphabet (Google) or Amazon are very low compared with other sectors.
The fact that these companies represent destructive monopolies and promote fake news, racism or other socially harmful content with their algorithms does not play a role in the ESG scores. Most CIO offices and committees should have learned that neither a climate-change target nor the U.N’s sustainable development goals can be achieved using the existing ESG rating system.
Investing in technology stocks is probably the easiest way into the world of ESG products. The CO2 emissions of companies such as Facebook, Alphabet (Google) or Amazon are very low compared with other sectors.
The fact that these companies represent destructive monopolies and promote fake news, racism or other socially harmful content with their algorithms does not play a role in the ESG scores. Most CIO’s offices and committees should have learned that neither a climate-change target nor the U.N’s sustainable development goals can be achieved using the existing ESG rating system.