Scientific Beta highlights pitfalls of ESG scores in portfolio construction
Scientific Beta highlights pitfalls of ESG scores in portfolio construction
ESG scores may lead to higher levels of greenhouse gas emissions and favour greenwashing
Many asset managers and index providers construct portfolios or benchmarks that provide very significant improvement in ESG scores.
In a recent paper written by Erik Christiansen, ESG and Low Carbon Investment Specialist, and Frédéric Ducoulombier, ESG Director, entitled "Scoring against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction," Scientific Beta underscores the danger of using average overall scores at the portfolio level, whether for investment or reporting decisions. While the ESG score-based approach to responsible investing serves the commercial interests of rating providers, academic research has underlined that these ESG scores would not be able to guide investors who are concerned about social welfare and environmental sustainability. Scientific Beta's criticism echoes that of international organisations as diverse as the OECD and the WWF, who have warned against viewing ESG scores as a meaningful indicator of an investment strategy's contribution to the achievement of ESG goals, in particular the fight against climate change. In very concrete terms, the 'E' dimension promoted by global ESG scores leads to decisions that may favour companies that have a considerable impact on greenhouse gas emissions. More generally, the lack of consistency between the 'E' score and the climate dimension favours greenwashing.