Aegon AM: Are tobacco firms sustainable? Yes, according to flawed ESG ratings

Aegon AM: Are tobacco firms sustainable? Yes, according to flawed ESG ratings

ESG
Tabaksindustrie.jpg

Ratings agencies are missing crucial aspects of ESG analysis and taking a top-down approach that leads to perverse outcomes such as tobacco companies scoring highly on ESG factors, says Euan Ker, Sustainable Investment Analyst at Aegon Asset Management. Ker believes ratings agencies employ flawed methodologies that award strong ESG ratings to fundamentally unsustainable companies.

“Third-party ESG ratings are just inputs,” he says. “They are not the whole story. ESG screens generally do not consider the sustainability of the company’s products or services, by focusing mostly on how a company operates, rather than what it does. The ratings can inadvertently attribute strong sustainability credentials to companies whose products may be fundamentally unsustainable. MSCI gives Imperial Brands (a tobacco company) an A rated ESG score, for example.”

ESG screening by ratings providers have a significant blind spot when it comes to coverage and screening tools, which leads investors to a small field of the same choices, says Ker. Instead, Ker says his team prefers to focus on materiality and a bottom-up approach to assessing ESG credentials.

“Due to the qualitative nature of sustainability, there will always be debates, grey areas and nuance, which is why the topic, quite simply, must be approached from the bottom-up, not from a thematic perspective. The danger of simply using off-the-shelf ESG ratings is relying on a myriad of plain vanilla, ‘me-too’ type ESG products. Our focus on mid-cap sustainability ‘improvers’ creates a differentiated portfolio and allows us to allocate capital to companies that we believe are really making an impact.”