Scientific Beta

SG Voice: "The growth of ESG and climate investing has led the industry to promote strategies that aim to fulfil both higher ESG scores and lower carbon emissions. According to a new report by French consultancy Scientific Beta, the potential trade-off between these two dimensions has been overlooked."

SG Voice 02/08/2023

"(...) The growth of ESG and climate investing has led the industry to promote strategies that aim to fulfil both higher ESG scores and lower carbon emissions. According to a new report by French consultancy Scientific Beta, the potential trade-off between these two dimensions has been overlooked. (...) The cross-sectional rank correlation between ESG scores and carbon intensity is close to zero. Because the two objectives are unrelated, they are difficult to simultaneously achieve for investors. Scientific Beta said that this low correlation explains ESG and carbon scores should not be mixed in portfolio weighting schemes. A more sensible alternative is to separate the two objectives, by first screening out stocks with low ESG scores, and then weighting the remaining stocks by the investor’s key objective, carbon intensity in our case. Since both dimensions are unrelated, screening out stocks by ESG scores does not affect the carbon intensity distribution of the stock universe. As such, ESG exclusions result in a neutral impact on portfolio carbon intensity, with a green dilution close to zero. (...)"