As Global Head of Research for MSCI ESG Research, Linda-Eling Lee oversees all ESG-related content and methodology and chairs MSCI ESG Research’s Ratings Review Committee. She leads one of the largest teams of research analysts in the world who are dedicated to identifying risks and opportunities arising from material ESG (environmental, social and governance) issues. The team, located in 14 offices globally, provides ESG ratings of 5,700+ issuers; industry and thematic research; and analysis used by investors for positive and negative screening. Linda joined MSCI in 2010 following the acquisition of RiskMetrics, where she led ESG ratings research and was head of consumer sector analysis.
Christopher Skroupa: The Global Sustainable Investment Review 2014 estimated the market at USD $21.4 trillion, up from USD $13.3 trillion in 2012. Why are investors increasingly taking ESG into consideration in their investment portfolios?
Linda-Eling Lee: What these numbers reflect is a growing focus on the part of institutional investors towards the long-term sustainability of their investments. Many of them share the concern that incentives throughout the capital markets – from executive pay to investment management fees — have encouraged an excessively short term orientation and have ignored significant externalities that can depress long-term growth in the market as a whole. Taking a longer term orientation means incorporating the impact of environmental, social and governance (ESG) factors into portfolio risk and returns. These are a broader set of risk and growth factors beyond conventional financial metrics that investors are now increasingly taking into account in a systematic way in the investment process.
Skroupa: The sustainable investment industry is growing rapidly but suffers from definition confusion. How does MSCI define sustainable investing or “ESG”?
Lee: The motivations behind sustainable investing often include both financial and values-based considerations. The confusion comes when these two motivations are not clearly identified as such and distinguished from each other. What most people are familiar with is socially responsible investing (SRI), which has traditionally involved investors implementing negative screening to align their investments with their religious or ethical values or to comply with a legislative or norms-based mandate. Aligning investments with an investor’s values is distinct from looking at ESG factors through the lens of material risks and opportunities that can impact the core business of companies.
When referring to ESG investing, we are talking about this latter, financially-motivated perspective which is an approach outlined by the Principles for Responsible Investment (PRI). More than 1,100 institutional investors have signed up to the PRI’s voluntary principles, and these investors are motivated by their fiduciary duty to integrate the full range of risks and opportunities in their investment process and often also develop engagement strategies to mitigate specific risks in their portfolio.
Skroupa: MSCI ESG Research works with more than 900 asset owners and managers globally. What are some of the key ESG trends you’re seeing right now?