Is The FTSE 100 Anti-ESG?

The
ESG
Risk
Score
looks
at
a
company’s
exposure
to
specific
material
risks
and
it
evaluates
how
well
it
is
managing
those
risks.  

When
looking
at
the
iShares
Core
FTSE
100
ETF
(ISF),
a
proxy
for
the
FTSE
100,
according
to
Sustainalytics
data,
the
corporate
percent
of
the
portfolio
covered
by
a
negligible,
low,
medium,
high
or
severe
ESG
Risk
score
was
4.39%,
31.73%,
41%,
22.88%
and
0%
respectively.
So
more
than
half
of
the
index
has
an
ESG
risk
of
medium
and
above.

And
out
of
the
top
10
companies
by
market
capitalisation
in
the

Morningstar
UK
index,
four
out
of
the
10
leaders
have
a
high
ESG
risk
rating.

Glencore
(GLEN),
one
of
the
world’s
largest
commodity
traders in
markets
for
metals
and
minerals,
led
the
pack
with
a
score
of
37.

The
company
is
followed
by
BP
(BP),
Shell
(SHEL)
and
Rio
Tinto
(RIO),
which
reported
a
high
ESG
risk
of
33.8, 32.4,
and
32.3
respectively. 

Why
Are
These
Stocks
Controversial?

Glencore
is
allotted
a
severe
controversy
rating
by
Sustainalytics,
with
its
top
ESG
issues
being
bribery
and
corruption,
community
relations,
emissions,
effluents
and
waste,
as
well
as
occupational
health
and
safety.

Of
late
it
has
come
under
scrutiny
for
recording
a
huge
increase
in
carbon
emissions
last
year,
despite
its
low
emissions
targets.  

Its
emissions
rose
8.8%
in
2023
to
432.8
million
tonnes
of
carbon
dioxide
after
it
expanded
coal
production
and
reopened
an
oil
refinery
in
South
Africa.  

Although
BP
and
Shell
have
similar
ESG
risk
scores,
the
oil
and
gas
conglomerates
diverge
on
their
controversy
rating. 

BP
finds
itself
with
a
“significant”
controversy
rating
whilst
Shell
is
seen
as
more
problematic
with
a
high
controversy
rating. 
 

Although
the
two
oil
and
gas
majors
share
ESG
issues
ranging
from
emissions
to
occupational
health
and
safety,
bribery
and
corruption
is
a
theme
that
blemishes
BP’s
record
whilst
one
of
Shell’s
top
ESG
issues
is
community
relations. 
 

In
2019,
BP
was
found
to
have
promised
around
$10
billion
(£7.82
billion)
to
a
businessman
in
Senegal
in
exchange
for
access
to
the
country’s
coastal
natural
gas
fields.  

Meanwhile,
Shell
is
currently
facing
litigation
over
its
handling
of
chronic
oil
pollution
in
the
Niger
Delta
which
Nigerian
villagers
claim
has
destroyed
their
way
of
life.  

Community
relations,
emissions,
effluents
and
waste,
resource
use,
and
carbon
are
the
top
ESG
red
flags
for
mining
giant
Rio
Tinto.

The
business
also
has
a
high
controversy
rating,
with
it
facing
litigation
from
neighbouring
villagers
to
one
of
its
mines
in
Madagascar,
for contaminating
the
waterways
and
lakes
that
they
use
for
domestic
purposes.  

Are
US
and
European
Stocks
Lower
Risk?

In
comparison
to
the
S&P
500,
the
Nikkei,
and
the
Euro
Stoxx
50,
the
FTSE
100
is
the
index
has
more
companies
with
a
high
ESG
risk
rating.  

On
the
S&P
500
Meta
Platforms
(META)
is
the
only
stock
out
of
the
top
10
by
market
capitalisation
to
have
a
high
ESG
risk,
whilst
Mitsubishi
(MBI)
has
taken
that
crown
for
Japan’s
Nikkei. 

Euro
Stoxx
50
is
also
the
outlier
as

none
of
the
top
10
largest
stocks
by
market
capitalisation
in
Europe
have
been
branded
as
having
a
high
ESG
risk
by
Sustainalytics. 

In
terms
of
medium
ESG
risk,
the
cohort
is
larger. 

On
the
S&P
500,
Alphabet
Inc
(GOOGL),
Amazon.com
(AMZN),
Berkshire
Hathway
(BRK.A),
and
Eli
Lilly
(LLY)
have
all
received

medium
ESG
risk
classifications.  

On
the
Nikkei,
Toyota
Motor
(TYT),
Mitsubishi
UFJ
Financial
(MUFG),
Hitachi
(HTHIY),
SoftBank
(SFBQF)
and
Sumitomo
Mitsui
Financial
(XMF)
were
given
medium
ESG
risk
ratings. 

Whilst
low
and
negligible
ESG
risk
ratings
dominated
the
top
10
stocks
in
the
Euro
Stoxx
50,
with
LVMH
(LVMHF),
L’Oreal
(OR),
Hermes
(RMS),
SAP
SE
(SAP),
and
Industria
de
Diseño
Textil
(ITX)
classified
as
low
risk.

Meanwhile,

ASML
and
Schneider
Electric
(SU)
were
deemed
to
have
negligible
ESG
risk
ratings.  

What
do
UK
Equity
Fund
Managers
Think?

For
Laura
Foll,
portfolio
manager
of
the
Janus
Henderson
UK
Equity
Income
&
Growth
Fund,
there
are
nuanced
reasons
for
why
UK
equity
fund
managers
hold
certain
companies
despite
their
questionable
ESG
credentials.  

 “So,
you
get
to
a
Ukraine
year
where
suddenly
the
fossil
fuel
price
spikes
beyond
what
anyone
thought
would
have
happened.
Industrial
companies
had
a
tough
time
because
they
are
using
a
lot
of
fossil
fuels. 

“Their
input
costs
suddenly
jumped
unexpectedly.
You
must
have
something
elsewhere
in
the
portfolio
that
can
shoulder
some
of
that
and
do
better
in
those
types
of
times,”
she
told
Morningstar
UK
in
a
recent
studio
interview. 

Foll
also
argues
that
it
was
the
right
thing
for
her
fund
to
include
some
exposure
to
fossil
fuel
companies,
because
despite
the
desire
to
move
away
from
them,
many
industries
are
still
unprepared
for
that
transition.  

Do
Governance
Scores
Tell
a
More
Nuanced
Story? 

According
to
Sustainalytics,
when
analysing
the
iShares
Core
FTSE
100
ETF,
the
data
highlights
a
reasonably low
portfolio
governance
risk
score
of
6.66.

Company
governance
risk
Scores
from
Sustainalytics
measure
the
degree
to
which
a
company’s
economic
value
may
be
at
risk
to
governance
factors.
The
Governance
Risk
Scores
range
between
0
and
100,
although
most
of
the
score’s
range
between
0
to
25.  

Glencore
is
the
holding
with
the
highest
governance
risk
score
of
11.07.
Although,
BP,
Rio
Tinto
and
Shell,
which
all
branded
with
high
ESG
risk
scores,
have
much
lower
governance
risk
scores
of
7.39,
5.72
and
5.70
respectively.  

How
Can
Investors
Use
ESG
data? 

ESG
investing
allows
investors
to
exclude
certain
companies
from
their
portfolios
if
they
do
not
meet
the
right
environmental,
social
or
governance
criteria.
ESG
is
also
often
confused
with
impact
investing
which
allows
investors
to back
businesses
that
are
designed
to
address
a
specific
issue
or
to
offset
their
impact
on
the
environment
or
society
at
large. 
 

However,
what
is
clear
is
that
ESG
data
provided
by
services
like Sustainalytics
allow
institutional
and
retail
investors
to
have
more
transparency
in
their
investment
choices.
It
gives
people
the
autonomy
to
put
their
money
with
their
mouth
is.
If
you
are
solely
focused
on
returns
you
can
invest
in
whatever
company
or
fund
you
like. 

However,
with
ESG
data
allows
you
can
choose
to
invest
in
companies
which
share
your
values,
and
which
will
boost
your
investment
pots
if
they
achieve
a
positive
return
rate. 

Top
ESG
Funds
for
UK
Investors  

ESG
funds
have
suffered
outflows
in
recent
years.
Many
ESG
projects
have
struggled
to
sustain
returns
in
a
high
interest
rate
and
inflation
era,
and
investor
sentiment
has
weakened
due
to
poor
performance
since
2020,
a
successful
year
for
the
sector.

But
there
are
some
funds
which
remain
outliers,
with
strong
annualised
performance
over
five
years
and
above
average
or
high
Morningstar
Sustainability
Ratings.

The
Amundi
MSCI
Semiconductors
ESG
Screened
UCITS
ETF
(SEMG)
is
the
top
performing
passive
fund
over
the
five
years
to
June
10,
2024,
recording
a
30.09%
return
rate. 
 

With
investments
ranging
from
Nvidia
(NVDA)
to
Taiwan
Semiconductor
Manufacturing
(TSM),
the
passive
fund
outperformed
the
Morningstar
Global
Markets
Sustainability
Moat
Focused
Index
which
achieved
a
9.44%
return
over
that
same
period. 
 

Robeco
Smart
Energy
is
the
top
active
fund
over
that
same
period.
The
fund
with
a
5-star
Morningstar
rating,
returned
17.46%
versus
the
single
digit
return
of
the
Morningstar
Global
Markets
Sustainability
Moat
Focused
Index. 

Its
top
holdings
range
from
electric
infrastructure
provider
Quanta
Services
(PWR)
to
Scottish
clean
energy
giant
SSE
PLC
(SSE).  

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