Press Release - Boston, London, Nice, Paris, Singapore, Tokyo, February 7, 2022
After the Orpea affair in France, Scientific Beta again warns of the inadequacies of ESG scores
In light of the Orpea affair in France, in which a company that was ranked better than the rest of its sector in terms of Environmental, Social and Governance (ESG) scores from several rating agencies1 is accused of abuse of elderly residents in its nursing homes, Scientific Beta has reiterated that ESG scores cannot guide investors concerned with social welfare and environmental sustainability. International organisations as diverse as the OECD and the WWF have warned against viewing ESG scores as a meaningful indicator of an investment strategy's contribution to the achievement of ESG goals.
These warnings are buttressed by the amply documented lack of convergence of ESG scores across different providers. This divergence, which Scientific Beta analyses in Scoring Against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction, is due not only to differing objectives, definitions, methodologies and data, but also to the inherent subjectivity of assessment.
Far from being a purely technical matter, Scientific Beta showed that the unreliable nature of these inputs not only limits their usefulness but can at worst have negative impacts on the achievement of real-world ESG goals sought by investors. In this context it is noteworthy that as recently as in September 2021, Orpea reported2 that three ESG rating agencies had upgraded their ESG scores, putting Orpea among the leaders in its sector.
Scientific Beta conducted a survey of the readers of the Scoring Against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction paper and received broad and representative feedback from the financial markets participants that are the potential users of these ESG scores.
In Scoring against ESG? What are Market Participants' Views on ESG Scores? we documented widely shared scepticism on the robustness of the ESG scores themselves and on investment strategies that employ them by targeting higher portfolio-average scores. Often, even those who still favour using ESG scores do so for what they see as the lack of better options or in the belief that the shortcomings of ESG scores may be overcome with time.
For more detailed information, please refer to the following two Scientific Beta publications:
Scoring Against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction
Scoring against ESG? What are Market Participants' Views on ESG Scores?
1 ESG scores from MSCI, Sustainalytics, ISS ESG and Gaia Rating are highlighted in Orpea's annual report published in May 2021, available here
2 Press release on H1 2021 corporate performance, available here
About Scientific Beta:
Scientific Beta aims to be the first provider of a smart factor and ESG/climate index platform to help investors understand and invest in advanced factor and ESG/climate equity strategies. Established by EDHEC-Risk Institute, one of the top academic institutions in the field of fundamental and applied research for the investment industry, Scientific Beta shares the same concern for scientific rigour and veracity, which it applies to all the services that it offers investors and asset managers.
On January 31, 2020, Singapore Exchange (SGX) acquired a majority stake in Scientific Beta. SGX is maintaining the strong collaboration with EDHEC Business School, and principles of independent, empirical-based academic research, that have benefited Scientific Beta’s development to date. Since 2015, Scientific Beta has also been offering highly advanced strategies in the area of ESG and climate change, whether involving options integrated into smart beta indices or pure ESG or climate benchmarks.
As a complement to its own research, Scientific Beta supports an important research initiative developed by EDHEC on ESG and climate investing and cooperates with V.E and ISS ESG for the construction of its ESG and climate indices.
Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact: contact@scientificbeta.com, Web: www.scientificbeta.com.
