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Divest or engage?


There is ‘disquieting’ evidence that environmental, social and governance (ESG) metrics differ considerably among rating firms, says new paper led by the Centre for Endowment Asset Management at Cambridge Judge Business School.

Two business people sitting in office having conversation, woman looking towards man with concerned expression.

There is “disquieting” evidence that metrics to inform investors on environmental and other issues differ considerably across ratings services, concludes a paper led by the Centre for Endowment Asset Management (CEAM) at Cambridge Judge Business School.

The paper just published in the February 2020 edition of the Journal of Portfolio Management draws on a recent “Divest or Engage?” conference organised by CEAM, which considered both published and unpublished papers on environmental, social and corporate governance (ESG) issues.

“The authors caution that investors need to be aware of the disquieting evidence that ESG metrics differ considerably across ratings services, and the choice of data provider can have a fundamental impact on the ESG credentials of institutional portfolios,” the paper says.

“The choice of an ESG data provider may have more far-reaching consequences than many investors are aware of.”

Papers presented at the October 2019 conference, organised by CEAM in collaboration with the European Corporate Governance Institute, included a detailed study of ESG rating discrepancies by Professor Rajna Gibson of the University of Geneva together with Dr Philipp Krueger, Nadine Riand, and Dr Peter Steffen Schmidt.

“A member of the audience observed that the ESG rating discrepancies are in marked contrast compared to the strong observed correlations between Moody’s and S&P ratings,” the Journal of Portfolio Management paper says. “Moreover, the disagreement is higher for larger, less profitable firms and firms without a credit rating.”

In parallel with the Journal of Portfolio Management paper, a CEAM-led case on the debate in recent years at the University of Cambridge over fossil fuel investment has just been published in an ESG Special Issue of the Journal of Investing.

Dr David Chambers
Dr David Chambers

There are about £3.4 billion of endowment assets under management by the Cambridge University Endowment Fund, or CUEF, while the University’s 31 constituent Colleges hold about £4.6 billion in additional endowment assets, the authors say.

“In contrast with other journal articles, this one does not propose solutions,” the case study says. “Instead, it asks the reader to consider the arguments and to take a position.”

On engagement, the case study notes that previous research co-authored at Cambridge Judge Business School suggested evidence for modest outperformance in managed assets after successful shareholder engagement of companies regarding their ESG behavior.

“Whatever the recommended approach” by the chief investment officer of CUEF and the university’s chief finance officer (the two key figures in the case study), “full cognisance is needed of the CUEF fund-of-funds structure as well as the fact that any further moves toward responsible investing may require additional resources,” the case study says.

“Moreover, consideration should be given to the broader role of the University, given its particular strengths and influence, in combating the climate crisis.”

Professor Elroy Dimson, Cambridge Judge Business School
Professor Elroy Dimson

The case study says that the University of Cambridge has achieved returns significantly ahead of passive index-matching by following a fund-of-funds approach, which involves holding a portfolio of other investment funds rather than direct investment in stocks or other securities. Excluding certain stocks based on climate change issues would raise fears that some fund managers would be unable to accept the University’s money, which could restrict flexibility and lead to lower returns.

The paper in the Journal of Portfolio Management – entitled “Strategies for responsible investing: emerging academic evidence” (DOI: /10.3905/jpm.2020.46.3.026) – is co-authored by Vaska Atta-Darkua, a PhD candidate at Cambridge Judge; Dr David Chambers, Reader at Cambridge Judge and academic director of CEAM; Professor Elroy Dimson, chairman of CEAM; Zhenkai Ran, an MPhil candidate at the University of Cambridge Faculty of Economics; and Ting Yu, an MPhil in Finance candidate at Cambridge Judge.

The case study published in an ESG Special Issue of the Journal of Investing – entitled “To divest or to engage? A case study of investor responses to climate activism” (DOI: /10.3905/joi.2020.1.114) – is co-authored by Dr David Chambers, Professor Elroy Dimson, and Dr Ellen Quigley, a research associate at the Centre for the Study of Existential Risk at the University of Cambridge and an advisor on responsible investment to the University’s chief financial officer.