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Look beyond ESG ratings

As 2021 was drawing to a close, Bloomberg Business Week caused a bit of stir in the ESG investing world with its article, “The ESG Mirage”, published in December. The article is all about MSCI and its ESG ratings methodology. The mirage, according to the authors, is that MSCI ratings do not measure a company’s impact on the world, but only how ESG factors affect a company’s bottom line. As the Bloomberg Businessweek article points out, higher ESG ratings don’t always align with higher net positive impact on the world.

We give credit to Bloomberg Business Week for bringing the issue of ESG ratings to the forefront. To be sure, ESG ratings from MSCI do not wholistically evaluate a company’s ESG impact on the world and they do not score or measure the net positive or negative impact of a company’s products or services. However, there is no subterfuge or greenwashing here. MSCI is transparent about what its ESG ratings are all about (which, to be fair, is also acknowledged in the article). If you look at the MSCI methodology document, you will find this in sentence one of section one, “MSCI ESG Ratings aim to measure a company’s resilience to long-term, financially relevant ESG risks”.

However, the Bloomberg Businessweek article misses the point that, from an ESG perspective, what is often good for the company’s bottom line is also often good for the world. For example, if a company protects its reputation and avoids legal proceedings from staying clear of involvement in employee or human rights abuses, this is good for profitability and shareholder return, and it is also good for society. If a company reduces its greenhouse gas emissions to stay ahead of increasingly stringent regulation, this is good for its bottom line, and it is good for society. But net positive and negative impact is much more complex than an ESG score can capture - which is why an investment decision should never end with an ESG rating, from MSCI or any other research provider.

At Honeytree, we use multiple sources of data to inform our investment decisions, including much of the same corporate data that ESG ratings agencies collect, but we do not use ratings to pick our securities. We are a high conviction manager that chooses those securities where strong ESG performance AND the impact of products and services is directly connected and inextricably linked to profitability and projected returns. This is responsible growth: long term, sustainable, stakeholder-centric growth. All these elements (strong ESG performance, impact and financial performance) are necessary and none of these, on their own, is sufficient.

A rating is interesting, but it is the underlying raw data, and a manager’s ability to use this data with a wholistic perspective that creates the potential for impact oriented investing in the public markets.

[Image below is of a man looking at Mount Denali through the clouds using binoculars]


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