ESG Investing  

How machine learning is being used to combat greenwashing

  • Describe some of the challenges of ESG investing
  • Explain how machine learning can help
  • Describe some of current thinking about ESG investing

What this means is that, over the next decade or so, there will be less and less capital moving to companies that don’t change their behaviour in line with the Paris Accord and other ESG targets. The key will be to ascertain which risky areas to divest from this year, and which need to be tackled next year and so on. A divestment road maps might need to be built by investment managers covering the next 10 years or so, and this must be signed off by the investors. 

Saints or Sinners: all relative?

ESG risk analysis will need to consider also whether it’s about the level of GHG emissions that a company is putting out today or the degree of reduction intended or achieved. One also has to consider how material emissions are to the business a company operates in.

For some companies like BP or Shell, the scale of the task is clearly massive. So, arguably they should be rewarded for meeting or exceeding their emission reduction targets and diverting resource into clean energy projects successfully.

These are arguably the companies whose efforts to go green will yield the most positive results in terms of global GHG emission reductions because their impacts are the most material.  But are GHG emissions an absolute sin or a relative one?

Investors will need to decide therefore if they are puritans or pragmatists. In other words, do you decarbonise your portfolio of investments aggressively, come what may, potentially leaving some of the worst offenders with no direct incentive to complete their emission reduction programmes? 

Or, as a pragmatist do you instead accept that some businesses are materially worse than others and engage with them to support their transition for the good of all? Or, thornier still, is whether you levy the same punishment on an emerging market (EMs) energy company as a European one, given that tighter regulations will likely take longer to be enforced in EMs.

Every IFA client is different and special

Stopping to pause, I am amazed at how far we have come already. It was 30 years ago that I worked on the launch of what we called an Ethical Index fund. It proved to be a hot favourite with IFA clients at the time, and it was built on a simple exclusion approach – it was the FTSE All Share Index with a couple of hundred ‘offending’ companies excluded altogether.

But today’s clients no longer want a ‘one size fits all’ approach like this. There are a thousand different ways to save the planet, and we both can and should listen to investors’ preferences. Nuclear energy is wonderfully clean yet terribly dangerous. Wind turbines harness an unendingly renewable energy source but can extract a terrible toll on sea bird populations.