ESG ratings agencies under fire over ‘flawed’ scores

Firetrail Investments has launched a new ASX-listed fund but says it won’t be relying on ‘flawed’ ESG scores by external ratings agencies when picking stocks.

The S3 Global Opportunities fund listed on the ASX on Tuesday as an ETF.

Firetrail Investments has hit out at ESG ratings agencies for “inherent flaws” that produce results biased in favour of big technology companies including Alphabet, Amazon, Apple and Meta.

Firetrail’s head of investment strategy, Anthony Doyle, said the rankings favoured big tech companies, low carbon emitting companies, and companies which had the teams of staff available to engage with the agencies.

Speaking ahead of the launch of the fund’s ASX-listed S3 Global Opportunities Fund on Tuesday, Mr Doyle said this meant other companies working hard to improve sustainability were overlooked in global ESG investment strategies. “There are inherent flaws in the over reliance on external ratings agency providers for ESG scores,” he said.

“It you are a low carbon emitter, if you treat your staff well and you are well run, you will receive a high score from a ratings agency such as MSCI or Sustainalytics or Refinitiv,” Mr Doyle said. “There is an inherent bias towards large, mega cap growth names.”

He said this meant that ESG style global equity funds had underperformed over the last 12 months as a result of the sell off in growth and tech companies.

“If you are a higher carbon emitter or you don’t have the resources to work with these ratings agencies to improve your score, you score a poor score,” he said.

Firetrail is arguing that the process it uses in stock selection for its S3 Global Opportunities Fund takes a closer look at the upside potential of companies in terms of their sustainability.

The fund’s major investments are global companies which it believes have the potential to benefit from improved sustainability in the future. These include VW, grain company Archer Daniels Midland, which produces feedstock for renewable fuels, industrial gas company Air Liquide, copper miner First Quantum Minerals and timber company Weyerhaeuser, which Firetrail believes can benefit from a growing global carbon credit market.

The S3 Global Opportunities fund was launched by Firetrail, a fund manager founded five years ago from investment managers at the Macquarie Group, in November last year and listed on the ASX on Tuesday as an ETF. It holds some 30 stocks with more than $200m under management. It finished the day up by 1c to $4.19.

Firetrail says it aims to outperform the MSCI World Net Total Return Index over the long term.