The gap between ESG scores and sustainability is making it harder for investors concerned about the impact their investments are having on the environment.
ESG analysis needs to be more transparent so as not to mislead investors looking for products that “explicitly align with their values”, says investment research house Lonsec.
“In some cases, you can end up with a portfolio that looks very similar to the broader market when it comes to exposure to things like fossil fuels, gambling, tobacco, or deforestation,” said Lonsec head of sustainable investment research Tony Adams.
“For many investors, ESG integration might sound good, but in practice it will often fail to meet their expectations.”
Lonsec’s analysis of 159 Australian equity funds found that 19 per cent of managers scored highly for ESG awareness but poorly for sustainability, while 18 per cent of managers rated poorly in ESG awareness but performed well in terms of the sustainability of their funds’ underlying investments.
“Most investors, if you asked them, would assume there was a strong correlation between ESG and sustainability,” Mr Adams said.
“That there is such a significant discrepancy demonstrates that we need better communication and better tools to help investors make informed decisions about where they put their money.”
Mr Adams said that ESG funds needed to be more transparent about their composition and the size of their exposure to sustainable industries if they wanted to attract more interest from ethical investors.
“Whether it’s a company or a managed fund, what the investor really wants to know is: what industries and activities am I ultimately investing in and supporting?” Mr Adams said.
“While investors care about a manager’s investment process they are often more concerned about the impact their investment has on society, the planet, and future generations.”