Michael Aked
Scientific Beta, an equity index provider in the ESG and Multi-Factor investment arena, has challenged the conventional belief that investing in companies or portfolios with high ESG green scores guarantees excess returns or even significant climate impact.
The international index provider has brought its knowledge from Europe to Australia and says that on the surface, ESG portfolios may indicate outperformance, but they’re not moving the dial on achieving climate goals.
Since 2015, Scientific Beta has been providing cutting-edge strategies in the realms of ESG and climate change. In addition to its in-house research efforts, Scientific Beta actively backs a significant research endeavour led by EDHEC focused on ESG and climate investing.
During this period, Scientific Beta has developed three principles of climate impact investing anchored on the fact that green alpha is an illusion, directly challenging the damaging status quo that you can save the planet and deliver higher returns for investors.
Michael Aked, senior investment strategist at Scientific Beta, stated the firm is a strong supporter of ESG investing given its European roots but warns that the science behind green alpha is not robust and fraught with data mining. Mike agrees that it will not lower investors’ returns either.
“Many investors have been led to believe that green portfolios will lead to greater investment returns. This runs the risk that investors will be held hostage to ways and means of investment managers. We suggest investors outline their impact objective first and then require investment managers to deliver traditional investment returns within the investor’s impact targets,” explained Mr. Aked.
Aked believes there are three principles investors should follow when it comes to climate impact investing:
- maximise your impact objectives – understand the motivations and language for low-carbon investing and find the balance between company engagement and divestment
- green alpha is just an illusion – assess your value-added when accounting for sector exposures, downside risk and trends or shifts, and
- don’t let your impact be greenwashed away – evaluate whether your portfolio sends clear messages to company decision-makers.
“To realign key sectors with climate goals, we need to allocate capital selectively within and across sectors, championing climate change leaders and incentivising progress,” Mr. Aked concluded.