The study, co-authored by Noël Amenc, Felix Goltz, and Antoine Naly, shows that green dilution is pervasive, regardless of which ESG scores are targeted as objectives, substantial, with an average of 92% across portfolios, and robust across several alternative specifications. A 92% green dilution means that 92% of the carbon intensity reduction investors could have reached by solely weighting stocks to minimise carbon intensity is lost when adding ESG scores as a partial weight determinant. Only 8% of the carbon reduction objective survived the inclusion of ESG scores in portfolio weighting schemes.
Overall, the study provides clear evidence against the quantitative mixing of ESG and carbon scores in equity portfolio weighting schemes, which comes at great carbon cost for green investors. Conversely, the study provides evidence in favour of the exclusionary approach to ESG objectives, to best accommodate multiple non-financial and unrelated objectives.
Commenting on the study, Felix Goltz, co-author, and Research Director at Scientific Beta, said, "The carbon intensity reduction of green portfolios can effectively be cancelled out by adding ESG objectives. On average, social and governance scores more than completely reversed the carbon reduction objective. If you add more unrelated criteria, you are not going to perform well on all of them, so you have to think about your priorities. By adding too many you are losing the focus. 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."
The Scientific Beta study can be accessed here:
Green Dilution: How ESG Scores Conflict with Climate Investing, Scientific Beta Publication, June 2023
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