MSCI has urged investors worldwide to commit to integrating environmental, social and governance (ESG) considerations throughout their investment processes. The services provide believed that ESG needed to be more readily implemented in order to mitigate the risks and identify the opportunities of a rapidly changing world, and contribute to an effective transition towards a sustainable economy.
It has now published “The MSCI Principles of Sustainable Investing,” a framework designed to detail specific steps investors should undertake to improve practices for ESG integration across the investment value chain. It has been designed to help investors identify new investment opportunities, manage emerging risks and achieve long-term, sustainable investment performance.
The framework includes three core pillars that MSCI believes will lead to full ESG integration:
- Investment Strategy: asset owners should integrate ESG considerations into their processes for establishing and revising their investment strategy and asset allocation.
- Portfolio Management: portfolio managers should incorporate ESG considerations throughout the entire management process, including security selection, portfolio construction, risk management, performance attribution and client reporting.
- Investment Research: research analysts assessing companies and issuing investment recommendations to portfolio managers should integrate ESG considerations (including ESG company ratings) into their fundamental company analysis.
MSCI also aims to promote ESG transparency across the investment value chain by making publicly available its ratings of the most commonly owned companies worldwide, alongside the methodologies it utilises for ESG company ratings and ESG indexes. By April 30 2020, MSCI will also publicise the ESG characteristics of all MSCI Equity Indexes and of the most commonly owned mutual funds.
Remy Briand, head of ESG at MSCI spoke to Fundeye, and outlined how the company defined ESG on a practical level.
He told Fundeye: "It is true that different that different people will integrate ESG in different ways but we have put in the documents what we mean by ESG integration. This is really focusing on the most material long-form risks that may affect companies in any given sector. If you do that, you are taking into consideration the risk over a long horizon.”
Mr Briand acknowledged that, ideally, everyone would have the same definition, but that MSCI has have tried to define it in a way that “can provide clarity when people use these terms and approaches.”
He added: “That approach has proven to not at all be detrimental to performance.”
The ESG chief concluded with his thoughts on sustainable economies.
He said: “The biggest dimension for a sustainable economy is the transition towards a low-carbon economy. Clearly the current state is not sustainable, more and more people are realizing that. There will be a need for investment, and the contribution that the investment community and investment industry needs to do in this context is to move capital towards companies providing solutions. From the perspective of the investor it is about re-allocating capital.”
Henry Fernandez, chairman and chief executive officer at MSCI believed that the effects of climate change could potentially affect the pricing of financial assets and the risk and return profile on investments.
Commenting on the guidelines, he added: “The need for a set of guidelines that will help all investment institutions around the world manage emerging opportunities and inherent risks associated with ESG considerations in pursuit of long-term, sustainable investment performance has never been greater. MSCI is fully committed to helping investors make better decisions for a better world, and these Principles of Sustainable Investing play a part towards achieving that mission,” added Mr. Fernandez.
