• Jérome Bloch

Shane Meredith (SuisseTechPartners): ESG Scores and Investor Values

Shane Meredith, Head of Asia-Pacific Sales at SuisseTechPartners, says investors can select stocks for their portfolios that reflect their own support for Environmental, Social and Governance (ESG) values. However, one should nuance the ESG rating process according to national policies in Asia.

ESG scores can help investors tailor their portfolios to fit their values. Companies such as MSCI and Sustainalytics evaluate companies on Environmental, Social and Governance (ESG) standards. The ESG ratings can help an investor determine if a company reflects his or her values. For example, a person who values democracy could reject Chinese stocks such as Alibaba (BABA) and Tencent Holdings (TCEHY) because of China’s undemocratic government. Instead, that investor may prefer an Indian company such as Tata Motors (TTM). Tata is headquartered in a democracy, India, and it builds cars in another democracy - the United Kingdom. Investors’ use of ESG ratings shows what those people value. For example, an investor with strong environmental concerns could buy Tesla (TLSA) because of Elon Musk’s commitment to electric vehicles. Conversely, a person who values workers’ rights could reject Tesla because of Musk’s hostility to unions. That investor may prefer Ford (F), an old-line automaker dedicated to electrification, that has a strong relationship with the United Autoworkers Union.

"In Asia, ESG is more complex because government policies in countries such as China set corporate ESG policies.”

ESG Scores Reflect a Company’s Values

Among other factors, the governance rating shows how the company treats workers and customers. In Asia, ESG is more complex because government policies in countries such as China set corporate ESG policies. The Chinese government, for example, is mandating the adoption of electric power and reduction of greenhouse gases. Thus, some Chinese companies could receive high ESG scores by following government policies.

ESG Ratings Limitations

Some companies get low ESG risk ratings because of the nature of their businesses. Sustainalytics gives Netflix (NFLX) a low ESG risk rating. Netflix only receives a low ESG risk rating because it owns no manufacturing or transportation infrastructure. Netflix generates few greenhouse gases because it does not need factories to make movies and TV shows. Similarly, Netflix distributes its products digitally, so it needs no trucks, ships, or trains. Thus, Netflix gets a good ESG score because of its nature, not its management policies. Thus, Netflix is a company with good ESG ratings that will not reflect many people’s values. Many people who appreciate Netflix’s lack of greenhouse gases will have moral objections to the content of much of its programming.

In particular, many Netflix programs will conflict with some investors' social ratings. For example, programs with violent or sexual content. Wealth managers need to understand ESG because ESG ratings can help individuals determine if investments reflect their values. However, wealth managers need to understand that ESG criteria will not reflect all of an investor's values.

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