Lee: Our annual Top 5 ESG Trends to Watch report outlines the trends that our clients are talking about. Among those, climate risk has probably gained the most significant traction within the financial community this year. Many institutional investors globally have taken concrete steps recently to identify the holdings in their portfolio that are most vulnerable to losing significant asset value in the transition to a low carbon economy. Increasingly we are seeing some big investors shift capital to mitigate those risks, including divesting from coal holdings and allocating to passive strategies such as replicating innovative low carbon indexes in an effort to significantly reduce portfolio carbon exposure while minimizing short-term market risk. Another trend we noted is related to the quality of corporate governance and who sits on boards. We are seeing increased investor attention to whether directors have the relevant skills and the diverse backgrounds that can enhance board oversight of management on behalf of shareholders.
Skroupa: With the emphasis on corporate disclosure and reporting, and the associated organizations like Sustainability Accounting Standards Board, there is a lot of information out there for investors. How can investors distill a meaningful signal from the noise?
Lee: It’s challenging to wade through ESG information because much of what is disclosed is not financially relevant. It’s also hard for investors to know what any piece of ESG data means without industry context or rigorous peer benchmarking. That is why we see a great deal of uptake among institutional investors for using ESG ratings in their investment analysis. Ratings that are constructed to reflect material ESG issues are being used to help identify outliers in a portfolio – the leaders and laggards in an industry that portfolio managers want to pay more attention to. We also see that ratings and scores are being customized by different institutions to provide an ESG snapshot of the funds in an investment portfolio. These ESG snapshots often sit on a ‘dashboard’ alongside financial information and help institutional investors monitor the ESG profile of their portfolios without introducing a lot of noise into the process.
Skroupa: With one of the largest global teams of ESG analysts in the industry, what has been MSCI’s goal in growing the team?
Lee: We have been very focused on growing our capability in two areas: local expertise, especially in emerging markets, and quantitative modeling skills. There is no substitute for having on-the-ground knowledge and context, especially when it comes to ESG issues that are evolving very rapidly due to socio-economic and political changes. The regulatory environment in China for example has been shifting very quickly, which is why having nine analysts fully dedicated to tracking Chinese government, media, and NGO sources for ESG information is crucial to our coverage of Chinese and global companies. MSCI also continues to invest heavily in developing next generation models designed to identify ESG risk and opportunities. We’re confident that tapping advances in data analytics can help transform ESG analysis into a more quantitatively-driven and rigorous investment tool.
On June 19th, 2015, Skytop Strategies will present, “ESG Summit,” hosted at Nasdaq’s MarketSite in Times Square, New York. Continue the discussion with Linda-Eling Lee and 180 institutional shareholders, public company managers and capital markets experts at this full-day conference, designed to explore new ways of factoring ESG performance into cost of capital and company ratings. To inquire about attending, contact Victoria Billman at firstname.lastname@example.org.