ESG labelling provides limited insights for investors, study says

An analysis of 6,000 US funds has concluded there is no such thing as a “good” or “bad” investment in terms of the UN’s Sustainable Development Goals.

Instead, the picture is far more complex, according to Util, a sustainable investment data specialist, which is calling for the unbundling of environmental, social and governance (ESG) factors in a report that identifies leaders and laggards according to UN SDGs.

“Almost every company, industry and fund impacts some goals positively, others negatively,” Util said in its report released on Thursday that used machine learning in its assessment.

For example, it found that the 10 laggards on Climate Action were mostly utilities funds. Against other SDGs, however, every one of them is among the top 100 leaders in terms of the Quality Education; Affordable and Clean Energy; Decent Work and Economic Growth; and Industry, Innovation and Infrastructure metrics.

The “E”, “S” and “G” represented such different, even conflicting, objectives that it was time for the concept to be scrapped, the company argued.

“What our research highlights is the need for an approach that allows for a lot of different investor preferences,” said Patrick Wood Uribe, chief executive of Util, adding that attempts to categorise companies as only good or bad did not meet the need for nuance.

“This is more accurate,” Wood Uribe said, adding that it fitted with a global trend towards more personalisation.

For some funds, for example the BAD ETF, a US-listed exchange traded fund that focuses on the betting, alcohol, cannabis and drugs (biotechnology and pharmaceutical) industries, its laggard status according to three UN SDGs is exactly where its founder expected it to end up.

“I wouldn’t want to say that we are totally contra ESG, but we don’t think that investors should sacrifice their returns because of some stigma or something,” said Tommy Mancuso, president and founder of the BAD Investment Company.

BAD, which launched in December last year, has $8.7mn in assets under management and has lost more than 16 per cent since the beginning of the year. Mancuso is adamant, however, that the fund is well positioned to benefit from regulatory changes and a general market upturn.

“I’m in complete disagreement with any person who tries to shame someone for the way they invest. In the end, we invest to make money,” Mancuso said.

In the laggard sections across the board, funds focusing on the extractive industries feature heavily. BAD was identified as a laggard according to the Quality Education, Gender Equality and Decent Work and Economic Growth metrics. It did not score highly on any metric.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said the report’s findings were welcome in many respects, although he cautioned against putting too much faith in the actual rankings, given the unreliability of data from some developing and frontier markets.

“The paper is right to call out some aspects of ESG and sustainable investing. It is a highly complex topic, which is often highly subjective, sometimes contradictory and often reduced to unhelpfully simple metrics,” Lamont said.

Util defended its decision to include funds that had not even set out to perform well according to UN SDG metrics.

“While demand is growing for tailored funds hooked around individual social or environmental concepts, we’re also moving away from the idea that ‘brown’ or ‘dirty’ activities should be scrubbed from portfolios,” Util said.

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