Scientific Beta

Financial Times: "Asset managers and index providers are increasingly using scores for environmental, social and governance (ESG) performance in selecting and weighting stocks — in a similar way to their application of smart beta factor metrics. But some experts now believe this approach is flawed. The first difficulty with using ESG performance scores in this way, according to Felix Goltz — an academic and research director at Scientific Beta, a data provider — is that there is confusion over the purpose."

Financial Times 01/11/2021

"(...) Asset managers and index providers are increasingly using scores for environmental, social and governance (ESG) performance in selecting and weighting stocks — in a similar way to their application of smart beta factor metrics. But some experts now believe this approach is flawed. The first difficulty with using ESG performance scores in this way, according to Felix Goltz — an academic and research director at Scientific Beta, a data provider — is that there is confusion over the purpose. “The starting point in the industry is that people believe ESG is a source of outperformance and, if it was [using the data in the same way as a factor-based approach], it would be a logical approach to follow,” he says. However, research has shown that the correlation between a high ESG metric and outperformance declines over time, he points out. (...) Goltz maintains, however, that while “the trend is definitely to use ESG scores and try to use them alongside other factor considerations”, it was not appropriate to do so. “Most, in fact, use the ESG score as a factor even though there is no evidence that it is a factor,” he says. He says using ESG scores is easy, but it should be a separate consideration. (...)"