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Beware ESG ratings, strategist warns – look past them to find the best stocks to buy

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There are bubbles in so-called ESG stocks that are continuing to grow, according to strategists at asset management firm Bernstein, who warned of the dangers of third-party ratings.

In a recent note, Bernstein named stocks in the space its analysts still expect to outperform — but they're not necessarily the companies with the highest ESG scores.

ESG refers to environmental, social and governance factors and has become a big area of focus for investors as they look to assess the sustainability of their portfolios. However, the huge amounts pumped into ESG funds in 2020 created a bubble in the sector, the strategists argued, and the funds have "spectacularly underperformed" in 2021.

One problem is the ESG scores given to companies by third-party providers, they added, which are not necessarily related to whether or not a firm genuinely has good ESG practices.

They said it had driven an "increasing wedge" between the ESG stocks considered the best and worst in their industries, which could be distorting valuations — and potentially creating investment opportunities.

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