As published on ft.com, Wednesday 29 September, 2021.
Environmental, social and governance funds do little to drive change, largely because they rely on ESG rankings and other data that set the bar for good corporate citizenship “abysmally low”, research suggests.
Most sustainability funds, and the data underpinning them, focus on relative performance of metrics based on self-reported data, rather than on the absolute impact of their business activities on social or environmental goals, according to a report published last week from Util, a London-based fintech, that crunches publicly disclosed data to measure impact on sustainability goals.
As a result, sustainable funds look like and impact the world much like “vanilla funds”, the report noted. “Sustainable funds perform a little less badly, but the net impact is still bad,” it said.
The report is one of a string of recent studies to claim that ESG product providers focus more on looking the part than on effecting meaningful change.
However, some managers of ESG or sustainable funds argue that it is difficult to translate data and strategies into tangible outcomes that investors can appreciate.
“Our profession doesn’t do a very good job of working through ambiguity,” said Ethan Powell, chief executive of Impact Shares, which teams up with organisations including the NAACP and YWCA to offer social-outcome-oriented ETFs.
A lot of managers are not “intellectually honest with themselves” about the impact that they are capable of delivering, he added. Instead of dismissing ESG investing outright, asset managers and investors should assess the appropriate level of social and environmental impact for each dollar invested “and have a conversation about how they want their capital to influence the trajectory of the world around them,” he said.
The problem, according to Util’s data, is that sustainable funds do not have much positive impact on an absolute basis.
The average sustainable fund scored 3 on a scale of negative 100 to 100 on performance against the United Nations’ 17 Sustainable Development Goals, which were established in 2015.
The goals include targets for climate action, responsible consumption, gender equality and ending hunger and poverty.
Non-sustainable funds, meanwhile, received an average score of 1 out of 100.
However, the relative strength is nothing for ESG funds to ride high on, Util wrote. ESG funds on average have net negative impacts on five environmental goals, including clean water and sanitation, as well as protecting life on land and in the water.
“No matter your strategy, it’s likely your capital is contributing to environmental degradation,” the report said.
An increase in impact-focused data — which Util seeks to provide — can help managers better assess the impact that their investments have on the environment, the organisation claimed.
Other data advances may also make it easier for companies to address impacts that are material to their business, said Jennifer Grancio, chief executive 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 keynote address at the Morningstar Investment Conference. However, more recently, “there’s been huge progress”, she added.
Though ESG ratings may be “simplistic”, her company uses the raw data from providers as part of its core financial analysis of companies.
But looking at data alone does not indicate that a fund is impactful, said Impact Shares’ Powell. “Intent matters,” he said.
Engine No. 1, for example, focuses on the long-term changes that will make a difference, even if it means a short-term financial impact, Grancio said.
The investment industry had let itself “be reduced down to the quarterly income statement analysis” as the primary way of assessing risk and reward, she said.
“The impacts for different companies do have a material impact over time,” she added. “Continually making the case for long-term benefits can effect change.”