Research suggests that environmental, social and governance funds contribute little to change, especially as they rely on ESG rankings and other data that set the standard for good corporate citizenship ‘low’.
According to the report published last week by Util, a London-based fintech, which discloses information to measure the impact on sustainability goals.
As a result, sustainable funds look and affect the world much like “vanilla funds,” the report said. “Sustainable funds are performing a little less, but the net impact is still bad,” he said.
The report is one of a series of recent studies claiming that ESG product providers focus more on looking at the part than making 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 does not work very well with ambiguity,” says Ethan Powell, CEO of Impact Shares, which works with organizations, including the NAACP and YWCA, to offer social outcomes-based ETFs.
Many executives are not ‘intellectually honest with themselves’ about the impact they can make, he added. Instead of investing in ESG, asset managers and investors should evaluate the appropriate level of social and environmental impact for each investment “and have a discussion about how they want their capital to affect the trajectory of the world around them,” he said. said.
According to Util’s data, the problem is that sustainable funds have absolutely no positive effect.
The average sustainable fund achieves 3 on a scale of negative 100 to 100 on performance against the United Nations’ 17 Sustainable Development Goals, established in 2015.
The goals include targets for climate action, responsible consumption, gender equality and the end of hunger and poverty.
Unsustainable funds have meanwhile received an average score of 1 in 100.
However, the relative strength is nothing for ESG funds to ride high, Util wrote. ESG funds, on average, have a negative impact on five environmental objectives, including clean water and sanitation, as well as the protection of life on land and in the water.
“Regardless of your strategy, your capital is likely to contribute to the deterioration of the environment,” the report said.
An increase in impact-oriented data — which Util wants to provide — could help managers better assess the impact their investments have on the environment, the organization claimed.
Other data advances could also make it easier for businesses to address consequences that are of major importance to their business, says Jennifer Grancio, CEO of Engine No 1, an activist hedge fund and ETF sponsor.
“If you go back ten years, the data was very unclear,” she said last week during her keynote address at the Morningstar Investment Conference. But more recently: ‘there has been great progress’, she added.
Although ESG ratings can be ‘simplistic’, her company uses the raw data from suppliers as part of its financial analysis of companies.
But just looking at data does not indicate that a fund has an impact, says Powell of Impact Shares. “Intention matters,” he said.
Engine no. 1 focuses, for example, on the long-term changes that will make a difference, even if it means a financial impact in the short term, Grancio said.
The investment industry has lowered itself to the quarterly income statement analysis as the primary way to assess risk and reward, she said.
“The consequences for different businesses have a significant impact over time,” she added. “By continually addressing the issue for long-term benefits, change can take place.”
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