Otago study turns up ESG lemons

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Asset managers in a climate initiative such as NetZero Asset Managers or the Investor Group on Climate Change, have much higher carbon intensity in their portfolios than those which aren’t members of such groups, according to new research.

Wednesday, December 14th 2022, 6:56AM 1 Comment

by Andrea Malcolm

Further, respondents that stated a decarbonisation strategy (a strategy specifically reducing exposure to emissions); or were motivated toward ESG investing by an ethical responsibility; or prioritised environment and climate change ESG themes, actually had similar carbon intensities to the rest.

Otago University’s Climate and Energy Finance Group (CEFG) surveyed 105 NZ retail global equity asset managers (27% of whom are headquartered in New Zealand and 36% in Australia) to understand why and how they integrate ESG information into investment decisions. Of the respondents, 59% were members of a climate initiative, 80% said they incorporate ESG across all funds, 91% were signatories to the United Nations Principles of Responsible Investing, and 44% had the term ‘ESG’ in their name.

The CEFG compared survey responses with portfolio holdings data to evaluate the stated and actual carbon performance of the fund managers.

Study co-author Dr Sebastian Gehricke, who also co-wrote the NZ Stewardship Code, says the investigation found “initial evidence of greenwashing.”

Across various ESG subthemes, fund managers tended to place the highest importance on climate change, followed by corporate behaviour. “Despite this, the number of respondents that provided portfolio-level carbon intensities, an easy metric to calculate, was very low and often understated.”

Through a further investigation of the determinants of carbon and ESG performance across the entire sample of survey respondents and non-respondents, the research authors showed ESG labelled funds had no significant difference in carbon intensities to those not carrying the label.

Dr Gehricke says the finding tends to be consistent with greenwashing, rather than a consequence of active engagement with high emission firms. “A common argument is that managers don’t divest because they engage and there’s good evidence to show that engagement collectively works, just like divestment collectively works. So, we asked about engagement and controlled for engagement as well as active engagements and the findings still hold.”

A working paper on the results concludes that to attract responsible investment flow, funds are overstating their environmental commitments without ‘walking the talk', with significant implications for investor welfare.

“The key element is always transparency. If it’s a lack of capability, be honest. Don’t claim to be doing more than you are.”

Meanwhile Barry Coates, founder of responsible investment guidance site Mindful Money, says exaggeration and misleading claims about ESG are still rife across New Zealand funds management.

Tags: ESG

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