Index provider MSCI has announced that it is expanding its ESG Research to include 21,000 mutual funds and exchange traded funds. The index provider’s specialist research arm, which focuses on Environmental, Social and Governance (ESG) matters, has developed MSCI ESG Fund Metrics following demand from wealth managers who want greater insight into the ESG attributes of their portfolios.
Index provider MSCI has expanded its ESG research to include 21,000 mutual funds and ETFs. The funds are scored according to over 100 individual metrics.
MSCI ESG Fund Metrics will measure the ESG characteristics of portfolio holdings and rank, or screen, funds based on a diverse set of factors including sustainable impact, values alignment and ESG risks, including carbon footprint.
It will work by giving each fund an overall score, the Fund ESG Quality Score, which reflects the ability of the underlying holdings to manage medium- to long-term risks and opportunities. The score is made up of a peer group percentile rank and an individual E- S- and G- Scores. Investors using the system will also have access to over 100 Fund Metrics to evaluate the ESG attributes of their portfolio, which fall into three categories: sustainable impact, values alignment and risks.
Eric Moen, Managing Director of MSCI ESG Research, said in a statement: “The development of Fund Metrics was based on client consultation, which included some of the world’s largest wealth managers who are looking for greater insight into the ESG attributes of their portfolios, reflecting growing attention to ESG among investors…. The demand from clients who want to consider ESG criteria to align their investments with their values is continuously increasing. Fund Metrics is a natural extension of our ESG ratings and research, adding even more transparency as the sustainable investing movement gains momentum.”
The March 2016 Fund Metrics report found that government bond funds and European equities scored highest on ESG Quality, while small‐cap US, emerging market equity, and high yield bond funds scored lowest. Variation also existed within peer sets – for example, Target Date funds with shorter time horizons tended to exhibit higher ESG quality, while longer‐horizon funds exhibited lower ESG quality.
Funds with higher scores are comprised of companies managing their ESG risks relative to industry peers.
It also found that 146 diversified US equity funds had over 10% exposure to companies owning high‐impact fossil fuel reserves like coal or oil sands at potential risk should climate regulations change. However, 1,051 US equity funds (with net asset value of $825bn) were virtually ‘fossil fuel free’, even though very few of these funds – if any – were marketed as such.
Finally, there were 3,158 funds identified across asset classes with significant exposure to sustainable impact themes (like alternative energy, health care, nutrition), of which only 14% were identified by MSCI ESG Research as specialized thematic or sector funds.
Credit Suisse commented in a statement that the demand from clients who want to consider ESG criteria and wish to align their investments with their values is continuously increasing. “We help them better assess ESG related risks to ultimately achieve a sustainable impact through their investments – without compromise on the performance side. We are delighted to see MSCI ESG Research now offer more tools designed to bring great transparency to portfolios.”
Anna Snider, head of due diligence for Merrill Lynch Global Wealth and Investment Management CIO Office, added, “We are delighted to see that MSCI ESG Research now provides tools designed to assist with fund due diligence and monitoring on ESG and impact characteristics.”
However, MSCI’s Moen warns that while transparency around the ESG Quality of a fund’s holdings may be used by clients to complement their evaluation and due diligence of fund managers, it does not provide an indication of the quality of a fund manager’s ESG strategy, capabilities, process or intentionality.
MSCI ESG Research is the world’s largest provider of ESG ratings, research and data. Its ESG Fund Metrics will be available directly from MSCI ESG Research and on third-party platforms through 2016. The research coverage currently includes 47 of the top 50 global assets managers, which is used to help with its investment-decision making process.