ESG rating firms are screening out many sustainable companies – including one which save lives during disasters – in favour of multinational companies with box-ticking investor relations teams, Kames Capital has warned.
The asset manager, which has a long track record in ethical investing, has questioned the relevance of the box-ticking ESG approach adopted by ratings agencies, which include giants such as S&P, Moody’s and Fitch, when it comes to selecting genuinely sustainable companies.
It highlighted the example of crisis management firm Everbridge, set up after the September 11 attacks, which provides communication systems for emergency responses to disasters.
Rather than being asked questions about its life-saving business model, it is asked about its use of clean tech and marked down as a result.
Ryan Smith, head of ESG Research at Kames Capital, says: “Everbridge provide mass communications in the event of an emergency. The very premise of what they do is related to sustainability.
For instance, their systems were recently involved when India was hit by cyclones, making people aware of the danger, better informing them and helping move them to safety. Yet they are rated poorly by these ratings agencies because they don’t tick all the boxes.
“For a company like Everbridge, ratings firms are looking for exposure to clean tech. But Everbridge’s focus is elsewhere – on providing these mass communications that save people’s lives, so asking them questions such as “Do they invest in clean tech?” is measuring their exposure to something which is wholly irrelevant.”
Convenient for passives
Smith says his firm will use screens to some extent, but it requires a lot of legwork to really add value.
“They are convenient if you want to launch a product quite quickly, they allow you to screen universes, the coverage is quite good, they work simplistically and that is quite convenient for new passive products. If you want to turn something you have already got into an ESG product, then they will do that for you, but they certainly don’t provide all the answers.”
Craig Bonthron, co-manager of the Kames Global Sustainable Equity Fund adds: “The way that companies are measured can be completely immaterial to a specific business. They could be marked down because have not returned a number or ticked the box on the ESG questionnaire.
“A large organization has a bureaucracy in place. A FTSE 100 or a large American company will have lots of people to allow them to fill out these ESG forms; a small company with say a US$1bn in market cap would not necessarily have that.
“There are inefficiencies in terms of the materiality of what’s important for the business. They may return information on the stuff that’s really material, yet they get they get meaningfully marked down.”
Too much information
Smith says the perception is that the more information you have the better, and the “more you can incorporate this stuff” the better your decision making. He argues that this could be a distraction.
“At the moment, the sales messages are that if you had all this information, somehow if you knew everything, that would that would lead to a better outcome. I think it’s pretty obvious that actually you need to focus on what’s really important about a business instead.”