Investing based on so-called E.S.G. factors has mushroomed in recent years, driven in part by big pension funds and European money managers that are trying new ways to evaluate potential investments. The idea has changed over the last three decades from managers’ simple exclusion from their portfolios of “sin stocks” such as tobacco, alcohol and firearms makers to incorporation of E.S.G. analysis into their stock and bond picks.
Sometimes, E.S.G. can be a warning flag for stock-market darlings “with aggressive consumer or product safety practices that may be skating too close to the edge,” said Linda-Eling Lee, global research chief for MSCI’s E.S.G. ratings. For example, MSCI downgraded Volkswagen two notches to its third-lowest rating in 2013 — two years before an emissions-test cheating scandal — in part because of “poor levels of director independence.”
MSCI is perhaps better known for its global stock indexes, but its annual E.S.G. index and research revenues have been growing at 20 percent annually and should top $44 million this year, making the segment the firm’s fastest-growing business.
On Pfizer, MSCI’s research noted the high volume of regulatory warnings that the company had received as of mid-2015, raising the risk of liability concerning five of its drugs. The downgrade caught Pfizer’s attention, and its representatives met with MSCI officials to update them on legal issues like asbestos lawsuits, and about various drugs like Zoloft, Effexor and Protonix. MSCI kept its rating.
The amount of assets managed using E.S.G. factors has more than tripled to $8.1 trillion since 2010, according to a report issued in November by the US SIF Foundation, which tracks sustainable investing. The TIAA-CREF Social Choice Equity Fund has doubled in size to a current $2.3 billion in the last five years. Exchange-traded funds linked to MSCI E.S.G. indexes have tripled to $3 billion in the last three years. And there has been a proliferation of E.S.G. index or research providers, including FTSE Russell, S&P Dow Jones Indices and Sustainalytics, which helps Morningstar rate mutual funds on their E.S.G. factors.
A $2.4 billion Vanguard social index fund, which has quadrupled in size since 2011, uses a FTSE4Good index. A $2.5 billion low-carbon portfolio announced in July by the California State Teachers’ Retirement System will use an MSCI index.
Wall Street firms have jumped in; Goldman Sachs acquired Imprint Capital, an E.S.G.-focused firm, last year and Perella Weinberg Partners manages the Rockefeller Brothers Fund’s fossil-fuel divestment.
Surveys have shown that younger investors like the approach. Calls for fossil-fuel divestment linked to climate-change concerns have also raised awareness. Even the regulatory climate has shifted: The Department of Labor ruled last year that investing fiduciaries could consider E.S.G. factors in their investment decisions as long as they did not hurt expected returns.
Lisa Woll, chief executive of US SIF, said that even if a Trump administration “rolls back progress” on some environmental and social issues, the field over all “is likely to continue to grow based on demand by a wide range of investors.”
Assembled through acquisitions between 2009 and 2014, the MSCI E.S.G. ratings “have come to be the market standard for E.S.G.,” said Amy Orr, the director of capital markets at the Heron Foundation, which pursues an anti-poverty mission.
Read more on The New York Times.
Picture from Pexels.