'ESG ratings have little to no relation to carbon intensity': 'Green' companies with high environmental, social, and governance metrics pollute as much as low-rated companies, report finds

A report from the Financial Times revealed that a company's environmental, social, and governance score has "little to no relation" to its carbon emissions, noting that high-rated firms pollute just as much as low-rated firms.

Felix Goltz, a research director at Scientific Beta, told the Financial Times, "The carbon intensity reduction of green [ie low carbon intensity] portfolios can be effectively cancelled out by adding ESG objectives."

Therefore, Goltz claimed, "ESG ratings have little to no relation to carbon intensity, even when considering only the environmental pillar of these ratings."

"It doesn't seem that people have actually looked at [the correlations]. They are surprisingly low," he added.

Goltz's conclusion was based on a study he and his colleagues conducted in which they analyzed 25 ESG scores from rating providers Refinitiv, Moody's, and MSCI.

Despite massive investments in ESG funds and a global movement to promote "green" companies, Goltz and his team found that the rating systems failed to distinguish businesses with reduced carbon emissions.

The rating systems create a score based on several factors unrelated to carbon emissions, including social and governance-related elements. Therefore, the report claimed that ESG metrics do not provide an accurate picture of a company's overall environmental impact.

Additionally, even when isolating "environmental" scores, Goltz's team found that it still "leads to a substantial deterioration in green performance." The team also noted that weighing only social or governance metrics with carbon intensity resulted in a worse overall rating.

"On average, social and governance scores more than completely reversed the carbon reduction objective," Goltz stated. "The correlation between ESG scores and carbon intensity is close to zero [at 4 percent]. The two objectives are unrelated and are therefore hard for investors to simultaneously achieve."

Goltz explained that a company with high carbon emissions may still receive a favorable ESG score if it is "very good at governance or employee satisfaction." He added that environmental metrics were "pretty unrelated to carbon emissions" because they considered factors such as water resources and waste management practices.

"If you are interested in reducing the carbon intensity of your portfolio, you are going to get that only by focusing on the carbon intensity, [otherwise] you are very quickly going to be getting green dilution," Goltz added.

Vice President for ESG outreach and research at Moody's, Keeran Gwilliam-Beeharee, told the Financial Times that there is a "perception that ESG assessments do something that they do not. ESG assessments are an aggregate product, their nature is that they are looking at a range of material factors, so drawing a correlation to one factor is always going to be difficult."

He noted that better, "more targeted tools" exist to assess a company's carbon intensity.

An MSCI ESG Research spokesperson told the Financial Times that its rating system is "designed to measure a company's resilience to financially material environmental, societal and governance risks" and "not designed to measure a company's impact on climate change."

According to the spokesperson, MSCI's environmental metrics are determined based on a company's past carbon emissions, "its plans to curb emissions," "clean technology" investments, and "management of biodiversity and nature-related risks."

A Refinitiv spokesperson told the Financial Times, "While very small, the correlation found in this study isn't surprising, especially in developed markets, where many large organisations — with focused sustainability strategies, underpinned by strong governance, higher awareness of their societal impact and robust disclosure — will perform well based on ESG scores, in spite of the fact that many will also overweight on carbon."

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