Stockholm (NordSIP) – A working paper by Professors Soohun Kim and Aaron Yoon has raised concerns over the contribution of UN PRI membership to the actual advancement of ESG investing and the sustainability agenda. The organisation responds that the limitations of the study hinder the generality of its results.
Kim and Yoon, from the Georgia Institute of Technology and Northwestern University, respectively, argue that the main benefit from membership of the UN PRI is the increased business flow rather than improved ESG performance.
“We find a significant increase in fund flow to signatory funds regardless of their prior fund-level ESG score. However, signatories do not improve fund-level ESG score while exhibiting a decrease in return. Further, they vote less on environmental issues and stocks in their portfolio experience increased environmental controversies,” they state.
“Funds that are smaller, younger, and had higher historical alpha are more likely to sign PRI, but only quant-driven and institution-only funds improve ESG post-signing. Overall, only a small number of funds improve ESG while many others use the PRI status to attract capital without making notable changes to ESG,” the report adds.
The analysis is robust to the choice of ESG scores as the researchers use MSCI ESG ratings, Sustainalytics Ratings and TruValue Labs, as well as to a range of alternative model specifications.
Following these results, Kim and Yoon conclude with a call for regulators to scrutinise asset managers’ ESG execution more closely and provide more detailed information on their ESG integration and for asset owners to be more aware of their capital allocation to ESG.
Narrow Sample, ESG Scores and Votes
Responding to these claims, a representative of the PRI highlighted several concerns with the current formulation of the paper, regarding which, we have learned, the organisation has been liaising with the authors. “First, the research involves a small and narrow sample size of only 470 US funds across 86 investors. Academics undertaking similar research would typically consider a sample size of 10,000 or more funds,” the PRI argues. “Second, the authors consider fund level ESG scores, which is not necessarily a measure of ESG performance. For example, funds could invest – and engage through their stewardship activities – in lower-performing ESG companies to seek ESG (and financial) out-performance, but in the process, leading to a lower, or overall, static ESG fund score.”
“Third, the paper states that funds ’vote less on environmental issues’, however, the paper’s own summary statistics find that 99.7% of the time signatories do in fact vote on environmental and social issues. In addition, the paper does not examine the degree to which funds are more likely to vote ’For’ ESG proposals, nor does the paper examine the real engagement activities of investors, which would have been a more appropriate set of analysis for this research,” the PRI representative adds.
“Finally, the findings are a ‘null result’. The authors do not find that funds increase their ESG scores, but this is not the same as saying that funds decrease their ESG scores. In other words, the authors are unable to find evidence of improvement, which is unsurprising, given the limited sample size and no control group.”
“PRI agrees that urgent progress is needed if we are to meet global sustainability targets, such as the Paris climate agreement and the UN SDGs,” the PRI concludes. “We will fully consider this research – as we do with all relevant academic research – to inform our work and that of our signatories.”