Now you need to be aware of funds and managers who are saying they are applying ESG factors to the process but are not (so called ‘green-washing’). Blindly following ESG scores without knowing and understanding what you are following can lead you to very different results. ESG scores can vary on who is doing the scoring. Even independent ESG rating agencies apply different techniques and methodologies to ESG never mind individual companies.
If you look at two of the biggest ESG rating agencies, MSCI, FTSE and use their output you can come up with different answers based off different opinions of what matters and levels of transparency. The well-known example of how different they can be is the treatment of the electric car company Tesla. MSCI ranks it top of ESG within the global automobile sector while the FTSE puts it as the worst carmaker globally on ESG issues. This example does highlight some of the subtle and less subtle differences between rating agencies; for example, MSCI gives Tesla a strong score for the environment as it focuses on the emissions produced by its products, while FTSE gives it a very low score on the environment as it focuses on the emissions produced by Tesla factories. FTSE also gives the company low scores based off lack of data while MSCI assume an average score if it has no data on certain metrics.
If you have a strong negative view on certain sectors, then your universe will always be limited as will be the case if you want funds to help solve a problem. But if you want funds that are aware of the importance of environmental, social issues and good governess then your potential universe is probably wider than you thought and is growing.
As with all investments please remember that capital is at risk and investors may not get back the original amount invested.
Screening out sectors or companies may results in less diversification and hence more volatility in investment values.