If you were to realize that Philip Morris, the leading tobacco company, is part of your ESG portfolio, how would you react? Would you call up your investment manager asking to get rid of the stock ASAP or would you be happy to hold one of the most sustainable companies in the tobacco industry?
Let’s be honest now. ESG screening is prone to sector bias. Mining, tobacco are in most cases automatically kicked out from ESG indices because of the nature of their activities. However, this does not mean that they are not complying to the best environmental and social standards in their own industry. In other words, they might be the best in class.
And after all, – continues the investment manager – we do need heating for our houses, fuel for our cars, a glass of wine from time to time. Therefore, why not target maximum portfolio diversification and also include companies that have made clear steps to align their business model with new regulations, that have dedicated a large portion of their R&D budget to adopt cleaner technologies regardless of their sector, and that have made clear improvements in their business practices?
“But these are clearly NOT sustainable companies! This is not what I was looking for!” might answer a disappointed investor. Who’s right and who’s wrong?
As index providers involved in the development of ESG strategies, how to effectively integrate ESG standards is a question we have come across many times. Thanks to our collaboration with experts in the field, we have always managed to find solutions satisfying our customers’ requests.