IMF research exposes ESG myths

The annual Global Financial Stability Report shines a light on industry truths

Investors are divesting from fossil fuel investments at an increasing rate, as transition risks are beginning to materialise more quickly in the coal sector.

The International Monetary Fund’s annual Global Financial Stability Report showed that more than $900 trillion had been divested from fossil fuel intensive activities in 2019, up from practically zero in 2013.

The report stated that investors were upping their divestment activities as the Dow Jones Coal Index, has tumbled over the past 10 years, as consecutive governments around the world announced emission reduction plans.

This wasn’t the only area where investors have been wising up to environmental threats to their portfolios.

IMF Researchers also noted that company losses relating to climate change-related natural disasters have increased in recent decades, with insured and non-insured losses growing steadily since records began in the early eighties.

ESG claims warning

Despite this, the report warned that those marketing dedicated “sustainable investment funds” to investors may need to caution claims of outperformance. As researchers found “no consistent evidence that sustainable funds regularly over- or underperform” their peers.

Other concerns were raised too. A lack of standardised ESG scoring methodologies across the industry – and the absence of a universally accepted taxonomy – may be doing more harm than good. The report claimed that there is “little apparent correlation between a company’s ESG score and its corporate valuation”.

However, researchers did find that companies in all geographies have been improving their ESG disclosures in recent years.

Of three stock markets analysed, Japanese companies listed on TOPIX scored the lowest for ESG disclosures, with companies listed on the S&P 500 second and those on Europe’s Stoxx 600 found to be the most transparent.

Read the full report here.