Environmental, social and governance funds do little to spur change, in large part because they rely on ESG rankings and other data that set the bar for good corporate citizenship “extremely low,” suggests research.
Most sustainability funds, and the data underlying them, focus on the relative performance of measures based on self-reported data, rather than the absolute impact of their business activities on social or environmental goals, depending a report released last week by Util, a London-based FinTech, which analyzes publicly disclosed data to measure impact on the Sustainable Development Goals.
As a result, sustainable funds look and impact the world much like “vanilla funds,” the report notes. “Sustainable funds perform a little less badly, but the net impact is still bad,” he said.
The report is part of a series of recent studies claiming that providers of ESG products are focusing more on the look of the coin than on making meaningful changes.
This article was previously published by Ignites, a title owned by the FT group.
However, some ESG or sustainable fund managers argue that it is difficult to translate data and strategies into tangible results that investors can appreciate.
“Our profession does not do very well in overcoming ambiguity,” said Ethan Powell, managing director of Impact Shares, which partners with organizations such as the NAACP and YWCA to deliver ETFs focused on social outcomes. .
Many managers are not “intellectually honest with themselves” about the impact they are capable of making, he added. Instead of outright rejecting ESG investments, asset managers and investors should assess the appropriate level of social and environmental impact for every dollar invested “and have a conversation about how they want their capital to influence the market. trajectory of the world around them, ”he said.
The problem, according to Util’s data, is that sustainable funds don’t have much positive impact on an absolute basis.
The average sustainable fund scored 3 on a negative 100 to 100 scale for performance against the 17 United Nations Sustainable Development Goals, which were established in 2015.
The goals include targets for climate action, responsible consumption, gender equality and the eradication of hunger and poverty.
Unsustainable funds, on the other hand, received an average rating of 1 in 100.
However, relative strength is not an asset for ESG funds, Util wrote. ESG funds have on average net negative impacts on five environmental goals, including drinking water and sanitation, as well as the protection of life on land and in water.
“Whatever your strategy, it is likely that your capital is contributing to environmental degradation,” the report says.
An increase in impact-focused data – which Use seeks to provide – can help managers better assess the impact of their investments on the environment, the organization said.
Further advancements in data can also make it easier for companies to manage impacts that matter to their business, said Jennifer Grancio, managing director of Engine No. 1, an activist hedge fund and ETF sponsor.
“If you go back 10 years, the data was very patchy,” she said last week during her opening speech at the Morningstar Investment Conference. However, more recently, “there has been enormous progress,” she added.
Although ESG ratings can be “simplistic,” his company uses raw data from suppliers as part of its basic financial analysis of companies.
But looking at the data alone doesn’t indicate a fund is having an impact, said Powell of Impact Shares. “Intention matters,” he said.
Engine # 1, for example, focuses on the long-term changes that will make a difference, even if it means short-term financial impact, Grancio said.
The investment industry has let itself be “reduced to quarterly income statement analysis” as the primary means of assessing risk and reward, she said.
“The impacts for different companies have a material impact over time,” she added. “Continually advocating for long-term benefits can lead to change. “
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