Companies with high ESG ratings pollute as much as their lower-ranked peers, a new study from Scientific Beta has found.
Scientific Beta research director Felix Goltz said ESG ratings have “little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings”.
“It can very well be that a high-emitting firm is very good at governance or employee satisfaction. There is no strong relationship between employee satisfaction or any of these things and carbon intensity,” he added.
As reported in the Financial Times, the researchers looked at 25 different ESG scores from providers such as Moody’s, MSCI and Refinitiv.
When investors consider scores with carbon intensity measurements, 92% of the carbon reduction benefit gained from weighting stocks based solely on their carbon intensity is lost.
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Only using environmental scores also led to a “substantial deterioration in green performance”, the researchers found. Additionally, combining social or governance ratings with carbon intensity resulted in portfolios that were less green than the market capitalisation-weighted index.
The researchers found there is a 4% correlation between ESG scores and carbon intensity, making it challenging for investors to simultaneously achieve both objectives.
The findings follow a strong demand for ESG investment, with green funds attracting net inflows of over £38 billion in the first half of this year, according to Morningstar, while the rest of the fund industry saw outflows of £7 billion.
A spokesperson for MSCI ESG Research said its ratings “are fundamentally designed to measure a company’s resilience to financially material environmental, societal and governance risks. They are not designed to measure a company’s impact on climate change.”
