A professor of finance at London Business School has said that ESG exclusion strategies are not always effective.

Speaking at an event organised by Research Affiliates, Alex Edmans of the LBS said that ESG strategies can improve investment returns but warned that ESG ratings can lead to box ticking and the exclusion of companies that fail to meet a particular ESG criteria, even if they are highly rated. This may occur if that particular criteria is not materially important to the running of that company. He concluded that exclusion strategies do not work with ESG because of the way companies are currently rated and the consideration of ESG factors in isolation. Moreover, exclusion can lead to the removal of an entire sector from an investor’s portfolio leading to underperformance if the sector performs well but excludes companies that are best in class.

He cited an example of this as being the exclusion of the alcohol industry despite companies such as SAB Miller which have CO2 reduction programmes.