The uneven path to carbon reduction
It is important to keep in mind that Responsible Investment is a spectrum of investing styles and that even the most sustainable investments can include companies which might today be scoring less well on ESG criteria.
Further, for all those concerned, we believe that we need to see greater focus by investors on identifying companies that are not simply ‘best-in-class’ on ESG issues today but also those which are transitioning to align with a lower-carbon world, or better social values.
If we were to rely only on external providers of ESG data and static scoring systems, we might be limited to a small number of ‘ESG champion’ investments,* while potentially missing out on the extensive opportunities others outside this classification might offer.
Investing solely in these types of investments risks attracting a disproportionate amount of inflows to this area. This could result in overcrowding in favored stocks and sectors, whilst also directing flows away from sectors which are vital for future economic growth, and most desperately need investment to achieve the necessary transitions.
If we take climate as an example, ‘dirty’ carbon-intensive industries (such as cement, heavyduty transport, steel, and chemicals) face the most significant net-zero transition challenges and costs. We will continue to need these industries for future growth, therefore without financing their transition, net zero may be impossible to reach.
It is important to keep in mind that Responsible Investment is a spectrum of investing styles and that even the most sustainable investments can include companies which might today be scoring less well on ESG criteria.
Further, for all those concerned, we believe that we need to see greater focus by investors on identifying companies that are not simply ‘best-in-class’ on ESG issues today but also those which are transitioning to align with a lower-carbon world, or better social values.
If we were to rely only on external providers of ESG data and static scoring systems, we might be limited to a small number of ‘ESG champion’ investments,* while potentially missing out on the extensive opportunities others outside this classification might offer.
Investing solely in these types of investments risks attracting a disproportionate amount of inflows to this area. This could result in overcrowding in favored stocks and sectors, whilst also directing flows away from sectors which are vital for future economic growth, and most desperately need investment to achieve the necessary transitions.
If we take climate as an example, ‘dirty’ carbon-intensive industries (such as cement, heavyduty transport, steel, and chemicals) face the most significant net-zero transition challenges and costs. We will continue to need these industries for future growth, therefore without financing their transition, net zero may be impossible to reach.
Kristina Church, head of responsible strategy, BNY Mellon Investment Management.
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MARK-265615-2022-04-25
