Senior fellow Steven Globerman says investment performance claims are unfounded
Relying on ESG rankings as an indicator of financial performance is a bad strategy, according to a new analysis from a senior fellow at the Fraser Institute.
While many Canadian investors continue to embrace various pillars of socially responsible investing, questions about the accuracy and availability of data and investment performance remain, with greenwashing among the issues.
Last year, Endeavour Wealth Management PM Grant White told WP why he was cautious about ESG funds.
“It’s not that I don't believe in environmental and sustainable investment. I 100% believe in that,” says Grant White, portfolio manager at Endeavour Wealth Management with iA Private Wealth Inc. “But I think a lot of managers have marketed funds with ESG wrappers to boost sales.”
Steven Globerman, senior fellow at the Fraser Institute and author of ESG Investing and Financial Returns in Canada, found that relying on ESG rankings to inform investment decisions is flawed.
“While government regulators and some industry executives promote the benefits of ESG investing, there’s no evidence of significant advantages for investors,” he said.
Globerman’s study looked at how changes in the ESG rankings of Canadian publicly traded companies impacted equity returns, by tracking 310 companies on the TSX from 2013 to 2022. He found no significant relationship between changes in ESG ranking (upgrades or downgrades) and financial returns, as measured by the price of shares and dividend income.
“Better performance on ESG rankings simply does not translate into better financial performance for Canadian firms,” Globerman concluded.
The ESG space faces several serious matters related to the validity of the information available to investors and a KPMG in Canada report from March this year highlighted the risk of firms being victims of ESG fraud, which typically involves the exaggeration, embellishment, or distortion of ESG data by parties including the victim’s employees or suppliers.
Assessing risk
WP recently spoke with Clark Barr, global head of ESG methodology at Morningstar Sustainalytics, who explained that applying some non-financial metrics in assessing an investment can help investors appropriately assess risk.
“The research we’ve done has shown that Canadian companies are somewhat better prepared and positioned in terms of ESG than the global average, but are still behind Europe,” Barr says. “That’s just about across all metrics. European companies report more and have better performance on key best practices that we look at.”
