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Scientific Beta highlights pitfalls of ESG scores in portfolio construction

Scientific Beta
·3 min de lecture

Press Release - Boston, London, Nice, Paris, Singapore, Tokyo, December 17, 2020

Scientific Beta highlights pitfalls of ESG scores in portfolio construction

ESG scores may lead to higher levels of greenhouse gas emissions and favour greenwashing

Many asset managers and index providers construct portfolios or benchmarks that provide very significant improvement in ESG scores.

In a recent paper written by Erik Christiansen, ESG and Low Carbon Investment Specialist, and Frédéric Ducoulombier, ESG Director, entitled "Scoring against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction," Scientific Beta underscores the danger of using average overall scores at the portfolio level, whether for investment or reporting decisions. While the ESG score-based approach to responsible investing serves the commercial interests of rating providers, academic research has underlined that these ESG scores would not be able to guide investors who are concerned about social welfare and environmental sustainability. Scientific Beta's criticism echoes that of international organisations as diverse as the OECD and the WWF, who have warned against viewing ESG scores as a meaningful indicator of an investment strategy's contribution to the achievement of ESG goals, in particular the fight against climate change. In very concrete terms, the 'E' dimension promoted by global ESG scores leads to decisions that may favour companies that have a considerable impact on greenhouse gas emissions. More generally, the lack of consistency between the 'E' score and the climate dimension favours greenwashing.

Scientific Beta highlights the additional concerns linked to averaging ESG scores across a portfolio and using such an average as a goal or constraint in portfolio construction. Portfolio optimisations based on average ESG scores magnify the estimation errors of individual ESG scores. Moreover, from an ESG risk management angle, average ESG scores provide useful insights only if one assumes that scores very accurately proxy for ESG risks and furthermore that these risks are linear. None of these assumptions are substantiated by academic studies, or even by intuition or casual observation. Ultimately, the use of these global scores leads to increased investment risks.

These dire warnings are buttressed by the amply documented lack of convergence of ESG scores across the different providers. This divergence is due not only to differing objectives, definitions, methodologies and data, but also to the inherent subjectivity of assessment.

Commenting on this research, Dr Noël Amenc, CEO of Scientific Beta, said, "The "Scoring against ESG?" paper on the risks of strategies based on ESG scores echoes extensive serious academic research that many ESG providers prefer to ignore in favour of short in-sample proofs of concept on the supposed superior risk-adjusted financial performance of ESG strategies."

This new publication from Scientific Beta follows important research results on the same subject published by EDHEC as part of the EDHEC Scientific Beta research chair, entitled, "Investment and Asset Pricing with ESG Disagreement." This publication shows that the lack of consistency in ESG ratings could distort the risk-return trade-off to the detriment of the investment and to the welfare not only of investors but also of society as a whole.

The Scientific Beta white paper on ESG scores can be accessed through the link below:

Scoring against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction

Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact:, Web: