How Wall Street Is Gaming ESG Scores

There are vast inconsistencies between the stated climate objectives of money managers and “the reality of their investments.”

While perhaps an unsurprising statement given all the reporting on Wall Street greenwashing, this conclusion by Paris-based business school EDHEC is tied to a more nuanced assessment of strategies behind climate-focused funds. While asset managers talk at length about the use of climate data to construct their ESG portfolios, many funds aren’t run “in a manner that is consistent with promoting such an impact,” EDHEC academics wrote in a 65-page report entitled “Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing.”

The findings add to a growing body of research questioning the climate and ESG-related credentials of this burgeoning corner of the asset management industry. Regulators in the U.S. and Germany have started separate investigations into potentially misleading investment products touting their environmental, social and corporate governance bona fides.

With supercharged hurricanes, massive floods and unprecedented wildfires sweeping the globe, it’s well past time for asset managers to start doing the right thing, said Felix Goltz, a member of the EDHEC-Scientific Beta research chair that compiled the study. But when one digs into how most of the largest climate funds are truly invested, one finds very few differences relative to major market benchmarks like the Standard & Poor’s 500, he said.

“Even though investors and managers communicate extensively about the use of climate data to construct their portfolios, these data points represent at most 12% of the determinants of portfolio stock weights on average,” Goltz said.

Looked at another way, this means that 88% of what guides a climate fund is what you’d find behind any other, non-green investment.