Responsible investing is going to be big -- so much so that MSCI Inc. expects its ESG indexes to eventually get more following than its traditional benchmark offerings.
The index provider already has about 1,000 equity and fixed-income gauges that measure companies and governments against 37 issues related to environmental, social and governance investing. Think themes such as Catholic or Islamic values, women’s leadership and low-carbon target.
Remy Briand, head of ESG at MSCI, sees more money tracking such benchmarks than the market-value weighted ones “over time.” For starters, assets under management following the company’s ESG gauges will likely double in 2020, continuing last year’s trend, he said in a phone interview.
The MSCI ACWI ESG Leaders Index surged 52 percent in the past five years, beating the 39 percent advance in the MSCI All-Country World Index. Tech and finance shares have the biggest weightings in both, accounting for more than a third of the gauges
“Do-good” investing has picked up globally, with at least US$30.7 trillion held in sustainable or green investments in 2018, according to the Global Sustainable Investment Alliance. This has proved to be a lucrative business opportunity for index providers, with MSCI’s ESG benchmark revenue likely growing between 60 percent and 65 percent to US$38 million in 2019, according to Morningstar Inc. analyst Colin Plunkett. Its operating revenue for the overall index business was US$921 million last year, up 10 percent from 2018, MSCI said Jan 30.
Several studies have shown that more sustainable companies tend to outperform over the long term. The MSCI ACWI ESG Leaders Index surged 52 percent in the past five years, beating the 39 percent advance in the MSCI All-Country World Index. Tech and finance shares have the biggest weightings in both, accounting for more than a third of the gauges.
Index compilers typically make money by providing investment firms with access to data and licensing benchmarks for the creation of financial products. MSCI also offers an ESG ratings system and research on the subject to help active managers build their portfolios.
To be sure, a common issue with socially and environmentally conscious investing is the so-called greenwashing by companies using misleading labels or advertising to create an illusion of environmental responsibility. Asset managers such as BlackRock Inc. have faced activist ire for not doing enough, and hedge funds have been slow to adopt the strategies, citing inconsistent data and a shortage of expertise.
While it may take decades to overtake the traditional indexes, “my personal view is the shift to ESG is going to happen much more quickly than most people would expect” because adoption is accelerating at a “surprising” pace, according to Briand.
Interest from European and American wealth-management firms is on the rise, while take-up of ESG indexes among Asia-headquartered private banks has been slower, he said, adding that between 80 percent and 90 percent of the assets under management tracking MSCI indexes still follow its market-value-based gauges. Revenue for the firm’s sustainable-investing gauges could grow by 35 percent to 40 percent annually in the next five years, Morningstar’s Plunkett estimated.
Briand said MSCI is now diversifying sources for sustainability-related information to go beyond company disclosures to proxies such as government fines, product reports and news coverage. About 45 percent of the input that goes into the ratings is not coming from company disclosures, according to him.
So far, the company’s strategy has worked: MSCI shares surged 75 percent last year, compared with a 29 percent gain in the S&P 500 Index.
“We cannot spend enough on ESG,” MSCI Chairman and CEO Henry Fernandez said in an earnings call last year.
HONG KONG NEWS