Which impact does investing in green organisations really have? For private and institutional investors, it is necessary to understand what organisations do to become more green and therefore eligible for a green ETF or managed fund.
Dr. Andreas Beck, a portfolio manager at Index Capital located in Germany, describes the implications of the financial instruments to steer business models to a more sustainable economy.
Here are the key takeaways by Dr. Beck:
- A green portfolio is not performing better than other portfolios:
Green bonds or a high ESG score limits you during the selection process of your portfolio. You only have a subset of companies who can be compared within the category (e. g. very high ESG score), but how do you do you continue to optimise your portfolio towards a high ROI. - The European Union wants to foster an investing in green companies:
Becoming a green company is a transformational process. The European Union is providing green bonds to foster the transformation, but ESG ratings is working against that. If you simply take an ESG value as an additional parameter during your analysis, you will always choose the better performing companies. You will ignore that a company is investing into their R&D and that the money is coming from the EU.
If a car manufacturer is on the way to reduce their carbon emission, they will not get the chance to be included into a ESG indices. That means, if you are investing in an ESG index, you don’t help to transform the economy, you rather help those companies which are already on the right path. - According to a study by the Leipnitz Institute, ESG investing doesn’t have an influence on a greener economy
Dr. Beck explains, that profits are moving from one company to another one. What does he mean by that? Imagine you are a big enterprise and you are well diversified. One business has a negative effect on your ESG rating and even if it is profitable, you want to follow your responsibility to maximise the return for your stakeholders. Therefore, you are selling the polluting business segment to keep your stock price high or even to increase it. That doesn’t mean the production has changed or the final product has produced less carbon emission.
The consequence, a high profitable business segment was sold and it is excluded by ESG indices, but the demand for a specific product still exist.
ESG investing might sounds great, but from an idiological point of view it is not. If you don’t want to invest in oil & gas companies, then pick tech companies. If you want to invest in organisations, which are already green according to rating agencies, then do that, but you are probably not supporting to change the economy with providing capital to invest in innovations and a transformation.