Scientific Beta ESG filter allowed Renault, Nissan and Mitsubishi to be excluded from ESG indices

The strict filter avoided investors being stuck with these stocks in the wake of the Carlos Ghosn scandal

A pioneer in the reconciliation of non-financial objectives and financial performance through responsible investment smart beta, Scientific Beta administers responsible investment indices that are tracked by circa USD15bn of institutional money. Scientific Beta was recently selected by Desjardins Global Asset Management to design a family of indices that respect high responsible investment standards and materially reduce exposure to climate change risk.

While encouraging better corporate practices in environmental, social and governance (ESG) matters, the indices in the SciBeta Desjardins Responsible Investing family also exclude companies that are involved in controversial activities or in critical controversies with respect to principles of responsible business conduct. Critical controversies concern fundamental issues and have high adverse impact on a large scope; fundamental issues are defined in reference to the Ten Principles of the United Nations Global Compact, which cover human rights, labour, environment and anti-corruption and are derived from international conventions and declarations that enjoy global support.

"Being involved in critical controversies in the area of the environment (Renault is suspected of having cheated on emissions tests, Nissan has admitted to it and Mitsubishi has been fined for misrepresenting the fuel efficiency of its vehicles), none of these companies was eligible for inclusion in the SciBeta Desjardins Responsible Investing indices at the latest rebalance," Frederic Ducoulombier, Director of Risk and Compliance at Scientific Beta, explains.

By separating ESG performance and financial performance objectives in index construction, Scientific Beta ESG indices treat responsible investing policies as fiduciary constraints and build smart beta indices that can add performance in a robust manner by establishing exposure to rewarded risk factors once these exclusions have been carried out. This means that unacceptable ESG performance cannot be offset by attractive financial characteristics and reciprocally, that the ESG characteristics of compliant stocks are not allowed to water down factor tilting or oppose scientific diversification.

This clearly differentiates Scientific Beta's construction approach from investment strategies that select or weight securities on the basis of metrics integrating ESG and financial data and are often promoted by advocates of the integrated ESG approach.

For Noël Amenc, CEO of Scientific Beta, "traditional integrated approaches promoted by a large majority of ESG solution providers that target an ESG or low carbon score without any exclusions and ultimately offset the poor ESG scores of some companies with the good ESG scores of other companies or, worse, offset the poor ESG score of a firm with the same firm's good exposures to selected financial factors, are practices that do not correspond to what a truly responsible investor should implement."

"In a passive investment context, outright exclusions on the basis of international norms and relative ESG performance also send clear signals to companies regarding the progress they need to make in respect of environmental, social and governance issues to meet their basic responsibilities and position for sustainable success," adds Noël Amenc.

The Scientific Beta white paper, "ESG Incorporation – A Review of Scientific Beta's Philosophy and Capabilities," can be downloaded through the following link:

ESG Incorporation – A Review of Scientific Beta's Philosophy and Capabilities, Scientific Beta White Paper, September 2018.

About ERI Scientific Beta

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.

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