High ESG Ratings Have 'No Relation' to Reduced Emissions


Smoke pours out of a factory in Copsa Mica, Romania.
(Photo by ANDREW HOLBROOKE/Corbis via Getty Images)


New research has revealed a surprising lack of correlation between companies’ environmental, social, and governance (ESG) ratings and their actual levels of pollution. Regardless of how they are rated on ESG metrics, companies pollute at roughly the same levels, according to Scientific Beta, an index provider and consultancy.

“ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings,” said Felix Goltz, research director at Scientific Beta. These findings come amid soaring demand for ESG investment, which saw a net inflow of $49 billion the first half of 2023, while the rest of the fund industry saw $9 billion in outflows, per data gathered by Morningstar.

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The research examined 25 different ESG scores from three major ratings agencies: Moody’s, MSCI, and Refinitiv. Remarkably, 92 percent of the reduction in carbon intensity achieved by solely weighting stocks for their carbon intensity is lost when ESG scores are partially included in the weighting.

More strikingly, even just focusing on environmental scores leads to a significant decline in “green performance.” Combining social or governance ratings with carbon intensity typically results in portfolios that are less eco-friendly than their market capitalization-weighted counterparts.

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“The correlation between ESG scores and carbon intensity is close to zero [at 4 per cent]. The two objectives are unrelated and are therefore hard for investors to simultaneously achieve,” Goltz added. This correlation is similarly low for the environmental pillar, which factors in a company’s water usage and waste management.

Keeran Beeharee, vice president for ESG outreach and research at Moody’s, agreed with these findings and asserted that ESG assessments are not a magic bullet for achieving low-carbon portfolios or other specific goals. After the launch of the UN’s sustainable development goals and the Paris Agreement, investors have realized they needed more targeted tools to tackle climate issues.

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A spokesperson for MSCI ESG Research emphasized that their ratings measure a company’s resilience to financial risks from environmental, societal, and governance issues, rather than the company’s climate impact. Refinitiv expressed a similar sentiment, citing that strong ESG performance could coexist with high carbon output, especially among large, developed market organizations.

The findings have also sparked a debate on the suitability of ESG as a mass market product. According to Goltz, the problem might worsen as more unrelated criteria like biodiversity are added to the ESG equation.


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