The post is largely dependent on graphs so I strongly suggest you check out this non-paywalled medium link**:**
The most relevant bits are :
ESG RATINGS:
Sustainalytics gives Tesla an ESG score of 28.6. It’s ranked 42 out of 83 in the automobiles sector, being beaten by the likes of Mercedes-Benz at 22.1 (lower being better).
Why is this?
This article published in February 2022 by the GRC World Forum suggests that the reason for the low ESG score is due to Elon Musk, or more accurately — the analysts opinions of Elon.
The author notes:
For transparency, labor relations, adherence to governance, for example, having a CEO who doesn’t send out random tweets, Tesla scores poorly
[Tesla’s 2019 impact statement] “was not exactly a statement that endeared Tesla to those who create ESG scores”
Musk is correct about the oil companies here, two oil companies (OMV AG: 27.4 and Repsol: 26.4) both have better scores than Tesla.
The key problem here is that E,S and G are all weighted equally, while not close to being equal in practice. E can be quantified, while S and G are entirely subjective. The equal weighting of each metric means that companies outstanding in one area are beaten out by seemingly much worse companies overall because of the other two dimensions.
The scores also don’t account for the wider impact that a company might have had, for example Tesla isn’t given get credit for helping to push other automakers towards EV’s. Regardless of how you feel about Tesla or Musk, it’s undeniable that had tesla not proved profitably and consumer demand, the EV market would not be as developed as it is today.
This is most egregiously demonstrated by the fact that Tesla has been dropped from the S&P 500 ESG Index for concerns about their working environment after being sued in a racial discrimination lawsuit.
You might agree that this is the correct course of action, if so, you will also likely agree that Amazon should be dropped after being sued for telling it’s employees to work through a severe weather warning, resulting in six of them being killed after the building was hit by a tornado, yet amazon remains the funds third largest holding.
You might also disagree that Nestle, a company that was sued earlier in the year for profiting from child slavery be given a 4.9 rating by FTSERussel and subsequently included in the FTSE4Good Index
This study from MIT Sloan shows that there are “widespread and repeated” retroactive changes to ESG scores by ESG ratings agencies in order to establish this relationship.
He explains that the data for any specific point in time should remain the same for a firm unless there is a documented reason for a retroactive change. However, their study revealed significant unannounced and unexplained changes to the data provided by Refinitive ESG, which was previously owned by Thomson Reuters. For example, looking at two versions of the same Refinitive ESG data for identical firm years — one from September 2018 and the other from September 2020 — the median overall scores in the rewritten data were 18% lower than in the initial data.
He notes that the data rewriting occurs on an ongoing basis without any public announcements. To show this, the researchers compared ESG scores from February 9 and March 23, 2021 — just six weeks apart — and found that 85% of firms’ scores changed. While the score changes were mostly small in magnitude, the ongoing retroactive changes affected the classification of firms and the link between ESG scores and returns.
Using predictive regressions, they showed that investing in firms with higher ESG scores in the initial data would not have led to economically or statistically significant performance gains. Yet, in the rewritten data, they found economically large, statistically significant positive effects of the E&S score on the firm’s future stock returns. These large differences matter because this performance would not have been possible with the data available to investors when forming their investment strategies.
ESG FUNDS:
Sector exposures across the funds revealed that information technology was the largest allocation in most funds, and an almost zero allocation in energy. This was one of the key drivers behind the shorter-term recent outperformance of ESG funds relative to their non-ESG counterparts, as tech stocks rallied in 2020 whilst energy declined.
So the overperformance of ESG funds compared to a wide index was because they are tech heavy.
Google was the most commonly held stock across most funds; Alphabet Inc. was in 12 funds, with an average weight of 1.9% . The companies with the highest average weight across the funds were Apple (5.6%) and Microsoft (5.0%)
So ESG funds are basically investing in the same things that most other funds do: Tech (FAANG) and industrials, with very little, if any allocation towards energy. This is permissible by their rules because all of these companies have good ESG scores. Afterall their CEO’s don’t tweet.The easy accessibility of financial knowledge on the internet has allowed retail investors to learn that actively managed funds mostly underperform passive index funds.
Prevailing wisdom for the last decade has been for investors to consistently buy the index.
The has meant the last decade has seen a steady increase in capital away from actively managed funds and into passive index funds and ETF’s:
The assets of equity index funds surpassed actively managed funds in 2019.
Largely driven by younger (millennial and gen z) investors, who don’t want to pay fees for below market returns.
The prospects for fund managers being able to attract young investors were not looking particularly positive until they found a new target:
The Socially Conscious Investor.
ESG funds are largely investing in the same ways that ‘standard’ funds do. This is allowed because the structuring of the ESG metric and the altering of data by ESG ratings agencies means that fund managers are able to invest in whatever they would like.
If the ESG rating of one provider doesn’t allow them to invest in the way they would like — they can simply choose another that does.The entire point of third party ratings is that the average investor doesn't have to concern themselves with it. The judgments are abstracted away from them.
Which is probably why most of the money flowing into ESG is going into active funds:Actively managed funds, and their fund managers salaries were being threatened by younger, savvy investors that might have otherwise invested into a passive index funds.
These funds have figured out a way to not only bring younger investors on board, but also charge an average 43% higher fee for ESG funds than for regular funds. It would be a very impressive feat of marketing if it wasn’t so deceptive.
I’m an ethically-minded millennial investor. Instead of investing in an ESG fund I'm going with the optimal investment method of consistently buying into a passive index and then donating a portion of my gains to charity.
I’ll do more good for the world and I'll keep my money out of the hands of scammers and thieves.
Submitted August 13, 2022 at 06:47AM by amwren https://ift.tt/SqKXL1D
