Exclusionary ESG: 'The tree that fell in the forest that no one heard'
PineBridge exec blasts 'weakest form of ESG'
An ESG policy defined by excluding companies is "the weakest form of ESG", according to Mike Kelly, global head of multi-asset at PineBridge Investments, who said the investment principle was "never supposed to be all about how you select securities", but rather "how you engage with those securities once you are an owner".
"If you are a university student in your 20s without any financial assets, making speeches [about environmental concerns] out on the campus, then good for you. Keep doing what you can," Kelly said.
"But when you look at the asset management industry, it would be a shame if that is all we did."
Kelly added that while credit is owed to "excluders" who "did kind of start the movement", the "real power" lies in getting asset owners and managers focused on engaging with companies for the "purpose of improvement".
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Passive investing falls under the banner of exclusion, according to Kelly, who defines ESG indices as "just another form of exclusion" but is quick to assert that the industry is "on the same journey" and active ESG is not competing with passive ESG as "we want everybody to do better".
"You do want managers on both sides of that fence, you want managers who bring all the different perspectives to the table," he explained.
"Those who are allocating to passive have a responsibility they need to recognise, which is to monitor the indexer's engagement on their behalf.
"As long as [the industry] is shifting away from active towards passive, the corollary has to be shifting towards much more active engagement, instead of merely how one selects."
ESG scores play a large role in not only selection, but in charting the improvement of investable firms and for Kelly the myriad scores in the industry mean that "ESG is in the eye of the beholder".
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"You find a lot of the providers are ranking the same security very, very differently and this is frustrating to many of us."
He points to the Sustainability Accounting Standards Board's (SASB) method of "measurable metrics" as a possible way to improve upon the current scoring system as they require "material kinds of disclosures" which are "hard to fudge" because they feature in annual reports and "if they are not accurate, the company is taking on a lot of liability".
"SASB is about not just disclosing everything in the world - do not give us a truckload of data - we want to focus on the materiality of the metrics that you are disclosing based on the industry you are in."
While Kelly's approach relies on engagement, he acknowledged that in some industries "engagement has not had any success, not just as a firm but as an industry".
"We do not own companies with a material amount of revenue from weapons of mass destruction or slave labour, child labour," he said.
"But our preference would always be engage first, vote against second, exclude third. If everyone starts by excluding, nothing improves."
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