Scientific Beta

This article, published in the Summer 2022 issue of the Journal of Impact & ESG Investing, identifies greenwashing risks in climate investing. Requirements are defined for strategies that are able to influence firms to reduce their greenhouse gas emissions. Based on stylised equity strategies constructed using firm-level emissions data, results show that commonly used portfolio construction mechanisms fail to demonstrate consistency with investor impact objectives. 

The article, published in the Summer 2022 issue of the Journal of Impact & ESG Investing, identifies greenwashing risks in climate investing. Requirements are defined for strategies that are able to influence firms to reduce their greenhouse gas emissions. Based on stylised equity strategies constructed using firm-level emissions data, results show that commonly used portfolio construction mechanisms fail to demonstrate consistency with investor impact objectives. Such equity strategies boil down to greenwashing: they exhibit attractive climate metrics at the portfolio level but do little to reallocate capital in a manner that would incentivise companies to contribute to the climate transition. 

Among the key findings of the research: 

• Climate scores have only a marginal impact on the weights of stocks in climate investing strategies. Stock weights are driven mainly by other elements, such as market caps.
• Climate strategies are indifferent, in their allocation decisions, to the deteriorating climate performance of firms.
• A key mechanism for creating improved portfolio climate scores is the simple under-weighting of essential sectors that play a key role in the transition to a green economy.
• For investors who subscribe to the impact objectives of net-zero initiatives, it is important to identify and mitigate greenwashing risks.