The proposals by the Technical Expert Group (TEG) for sustainable benchmarks and ESG disclosure will not lead to an increase in investments in the climate transition, says index provider Scientific Beta in a vicious 60-page rebuke of the TEG’s final report, which was published in autumn last year.
‘Onerous reporting requirements and expensive ESG disclosures as propsed by the TEG would discourage the offering and adoption of benchmarks that pursue climate change or other ESG objectives, says Scientific Beta CEO Noël Amenc.
ESG-washing
The index provider also accuses the working group of failing to propose a standardisation of ESG disclosure, even though this would benefit end investors, in an attempt to reconcile the co-existence of several divergent ESG rating methods. ‘In this, the TEG proposals not only do little to promote sustainability but also and most perversely allow ESG-washing to be performed under the falsely protective mantle of sustainability regulation,’ according to Amenc.
Scientific Beta is building a reputation of frank and bold criticism of its asset management peers. Last December, it voiced strong criticism of a Robeco paper which argued active management was necessary to prevent capacity problems in factor indices.
Scientific Beta, which is specialised in factor investing, is also disappointed with the TEG’s decisionn to anchor the construction of climate benchmarks to cap-weighted indices. ‘The proposal fails to take account of the variety of benchmarks used by institutional investors and their desire, which has been expressed for many years, to distance themselves from inefficient cap-weighted indices,’ says Amenc.
Industry lobby
According to Scientific Beta, the flaws in the TEG’s proposals could be due to its domination by providers of ESG data and services, ‘i.e. parties that stand to benefit from its proposals’. Though the working group had more than 30 members, it included few representatives of end-users of benchmarks, such as pension funds.
The adoption of a different method to calculate the carbon intensity of a company is another example of undue influence by working group participants, according to Scientific Beta. While the standard way to calculate the Weighted Average Carbon Intensity, or WACI, is to relate carbon emissions to sales, the TEG uses enterprise value as a denominator instead. ‘This metric is not widely accepted in the industry and it is at odds with the recommendations of the Taskforce on Climate-related Financial Disclosures. This metric however corresponds to that used by the Carbon Impact Analytics tool (2015) developed by two members of the Working Group which thus appear in a position to benefit from the TEG proposals,’ notes Amenc.
Scientific Beta is not the first organisation to criticise the TEG’s proposals. Only a couple of months ago, the NGO Influence Map also found an active lobby trying to weaken the working group’s recommendations.
Speaking to our sister publication Fondsnieuws last week, TEG-member Brenda Kramer claimed none of the TEG-members was acting as a lobbyist. ‘Everyone was engaged with a constructive attitude,’ she said.
You can read Scientific Beta’s entire paper here: Unsustainable Proposals, February 2020, Scientific Beta Publication