In 2012, EDHEC set up Scientific Beta, a “smart beta” index provider, on the strength of EDHEC Risk Institute’s research on the quantitative management of equity portfolios. The quality of the research and the intellectual leadership of its team enabled Scientific Beta to rapidly become one of the leaders in the new forms of systematic management of equities, with a total of more than USD 60 billion in assets under replication and institutional clients not only in Europe but also in North America and Asia.
Sold to the Singapore Stock Exchange for over EUR 200 million at the beginning of 2020, Scientific Beta continues to cooperate with EDHEC, especially by participating in joint research projects and by co-financing a research chair on ESG and climate investing. This research chair, endowed with an annual budget of EUR 1 million, contributes to improving knowledge and supporting research into integrating ESG and climate dimensions into institutional investors’ investment processes, risk management and asset allocation.
This chair, together with the research conducted by EDHEC Risk Institute in the area of climate investing, prefigures the creation of a new institute, the EDHEC Risk Climate Impact Institute (ERCII), which will be officially launched at the end of 2021.
The study on portfolio greenwashing
Since it was set up, the EDHEC-Scientific Beta research chair has given rise to extensive research and numerous publications geared towards investment professionals. Among these publications, EDHEC has highlighted a particular study that it is seeking to promote widely not only to investors, but also to all stakeholders to the climate question, namely the analysis of greenwashing practices in the construction of portfolios with climate objectives.
Indeed, for many years the financial sector has been positioning itself as part of the solution to the risk of climate change by offering to use its investment capabilities to engage companies on the necessary changes to products and production methods to limit greenhouse gas emissions. This engagement seeks to rely on a dynamic and reflexive process that aims to maximise the impact of investors on greenhouse gas emitters, who are also the issuers of the stocks in which they are invested. It involves not only engaging the companies’ governance on their contribution to climate change, but also, in line with this, to redirect investment flows depending on the responses and improvements observed from these same companies.
This movement has been strengthened in recent years with many laws and investor alliances being set up to organise and promote climate investing.
Unfortunately, it must be concluded that despite intense communication from the financial industry, the mismatch between the promises of climate investment strategies and the reality of the integration of companies’ climate performance into the funds and indices that represent these strategies is so large that we can speak of genuine portfolio greenwashing. In other words, the communication on the potential impact of the investment strategy on improving the climate situation does not correspond to the allocations promoted by these strategies. As such, the study on greenwashing in portfolio construction shows that climate scores only correspond on average to 12% of the difference in the weights of stocks in the portfolio for all the strategies that have a primary objective of impacting companies’ climate performance.
This inability of traditional climate investing strategies to significantly take the reality of companies’ climate performance into account to determine the weight of their stocks in the portfolio has very negative consequences for the potential impact of investor engagement on a challenge that has nonetheless been recognised by a very large number of these investors as being fundamental.
To shed light on this question, itemise the greenwashing risks of traditional climate investing strategies and promote new practices, EDHEC is organising a virtual presentation of the portfolio greenwashing study on September 21.