MSCI’s data has limitations that make it not “suitable for a proper portfolio construction” according to RepRisk’s Dr Heiko Bailer.
Speaking to Fundeye, the head of ESG quantitative investments for the Zurich-based data science company raised questions about MSCI’s approach to recording important information.
He explained: “The problem with MSCI ESG data is that they have changed their methodology several times and changed their historic rating. Their ratings are mainly based on company filing (self-reporting) which only reflects a small percentage of violations. Their update frequency can be slow as annual. The down rate companies are also based on their industry/sector. All in all, not really suitable for a proper portfolio construction.’
The criticism follows the American ratings and indices provider publishing a new framework for responsible investment late last month. The report, titled “The MSCI Principles of Sustainable Investing”, encourages investors encourages investors to fully integrate environmental, social and governance (ESG) factors into all stages of the investment process.
MSCI’s principles outline specific steps investors should take to enhance ESG integration across the investment value chain. It advocates implementing ESG considerations from the asset allocation stage, alongside the portfolio management and investment research phases of the process.
Dr Bailer acknowledge that standards of ESG mapping was needed, but argued that MSCI could only provide an incomplete picture of a company’s ESG. Believing that it was not “pushing anything new”, he compared MSCI’s proposed framework unfavourably to established ESG standards offered by the United Nations Global Compact (UNGC) pact and the Sustainability Accounting Standards Board (SASB). He revealed that his work at RepRisk was currently mapping to the ESG standards provided by those two bodies instead.
He also suggested that while investing in good firms could provide ESG alpha, it needed to be based on conduct rather than exclusion.
Summarising RepRisk’s approach, Dr Bailer added: “Our data looks at companies through the monitor of 90,000 daily sources in 20 languages and builds a true footprint of a company in ESG. We have been doing this steadily since 2006 without back changing data. Our daily rating series go back up to 13 years. This data enables firms to build solid “ESG conduct based” portfolio that yield the alpha one would expect from good governance.”
