When CEO Jane Fraser publicly said that Citigroup would cut off some clients to meet sustainability goals, she was doing just what a Swiss think tank says is necessary.
It is not enough for investors to remove companies from their portfolios to make the economy greener. They need to publicly declare they are doing so, Enterprise for Society (E4S) - a research center, including Lausanne's university, its IMD business school and technical university EPFL, finds in a recent paper.
Investors predominately apply the exclusion method as their main sustainability strategy, however, the effectiveness of depriving companies with bad environment social and governance (ESG) ratings of funding is limited, the study says.
In order for the measure to have an impact, investors need to publicly declare their intention to divest as it raises awareness among stakeholders and puts pressure on management to improve business practices. The amount divested also needs to be sufficiently large to be effective, the study found.
Industry by Industry
Speaking at a conference held by «The Wall Street Journal» (behind paywall) earlier this week, CEO Jane Fraser announced that going forward Citigroup would have to cut off some clients in order to meet its climate goals, as the paper reported.
In the future the bank would consider the project the client is launching, the commitments the client has made to greening itself, and how important the client is to Citigroup, Fraser said, adding that it would do so «industry by industry.»
Shareholder Engagement
However, the study finds that shareholder engagement strategies, which investors apply less frequently, are more effective than excluding companies altogether.
Rather than judging a portfolio’s sustainability by its ESG score or carbon footprint, it makes more sense to consider its potential to change the economy of tomorrow, the paper says.
This approach is used by Lombard Odier Investment Managers (LOIM). The asset manager says on its website that the transition to a net-zero economy is destined to come from companies that are currently high carbon emitters and that have the financial resources to transition to a much lower level of Co2 emissions in the future.
LOIM managing partner Hubert Keller recently said in a finews.com interview that a steelworks that was successfully decarbonizing was taking more effective action against climate change than companies in sectors that created little pollution.
