For many companies, today will represent a new era of public exposure on their environmental, social and governance (ESG) performance. MSCI, a provider of indexes around the world, is to make public the ESG ratings of 2,800 companies for the first time.
The companies form MSCI’s ACWI Index which rates companies on a AAA to CC scale. MSCI says the ratings use 1,000 data points across 37 “key” ESG issues that are reviewed weekly.
The move comes after a huge growth in ESG investing. Estimates put the total assets under management in ESG funds at around $20trn, or about one quarter of all professionally managed funds. Last month Willis Towers Watson reported that ESG funds had increased by 23% in 2018, bucking the general trend of declining assets under management. Last year Larry Fink, chief executive of BlackRock, the world’s largest fund manager, said the demand for ESG would “transform all investing”.
There isn’t a day that passes when an asset manager does not announce a new ESG fund of some kind, though the precise definition of ESG can be hazy.
According to Remy Briand, head of ESG at MSCI, investors increasingly view ESG factors as a “critical” elements in their portfolios. Going public with the data will boost company performance, he insists.
“We want to encourage open discussion among investors and companies on how to improve sustainability across the board and hope that making the MSCI ESG ratings available to all will facilitate these discussions,” Briand said.
Companies are under considerable pressure to improve their sustainability practices. But so too are asset managers and owners. Earlier this year the government required pension fund trustees to report on their ESG policies. Meanwhile, asset managers are viewed as having an essential role in pushing companies to improve, not just through investment decisions, but also through their stewardship activities.
Assertive action required
However, there are mixed results. In a blog post, Principles for Responsible Investment (PRI), a campaign group persuading asset managers to invest responsibly, worries that stewardship is not being used by some investors.
According to Paul Chandler, director of stewardship at PRI, there have been successes, but not enough.
“Unfortunately, these successes are the exception, not the rule. As we face growing systemic risks that cannot be diversified away—from trade wars to climate catastrophe—the willingness to act more assertively to safeguard long-term outcomes for beneficiaries is not keeping pace with the actions needed or being undertaken at the scale required,” Chandler wrote.
Investors have been “tentative”, he said, focused on short-term topics and individual holdings rather big picture issues. He also pointed to investors under-resourcing their stewardship activities.
PRI has now launched a programme to show how stewardship can been used to deliver changes across ESG factors. ESG funds themselves have become controversial, with research showing that some contain stocks that are heavily dependent on fossil fuel. Elsewhere, others have pointed out that many such stocks—energy companies, for example—involve heavy investment in renewables.
Formulating an ESG fund is an imperfect science: investors are still learning about the issues, though rule-makers, such as the European Union, have attempted to help by providing a taxonomy for sustainable finance. Going public with ESG ratings is all part of the growing pressure to act on climate and societal issues. As imperfect as the process is, the pressing nature of the climate crisis makes such action a valuable contribution.
