Following its acquisition of RiskMetrics, MSCI has begun expanding its sustainability research to emerging markets. But as it gains more experience in the sector, it has begun to look for more disclosure not only from companies but their institutional investors too. MSCI has begun extending its environmental, social and governance (ESG) research into emerging markets companies to enable investors benchmarked to global indexes – such as the MSCI All-Country World Index – to better incorporate ESG risks in their portfolios, said Remy Briand, global head of index and ESG research. But as the company focused on unearthing market-sensitive ESG information from companies, Briand urged asset owners who had committed to sustainable investing to dramatically improve their reporting on their ESG programs.
MSCI already ran a series of 23 ESG indexes for the MSCI World index and various countries and industries. But its acquisition of RiskMetrics, which brought it governance specialist ISS Proxy and sustainability researcher Innovest Strategic Value Advisors, gave it a foothold in the ESG ratings market. It had since learned that while asset owners were pressuring funds managers to take ESG risks into account, many were not fulfilling their part of the deal by providing detailed ESG reporting at the portfolio level, Briand said. “They ask managers to manage ESG, but they’re not looking at how they’re doing.” Reporting by asset owners provided crucial feedback for managers and stakeholders, Briand said, and without it, claims that ESG risks were taken seriously rang hollow.
MSCI also benefitted from the asset owners that did provide this reporting because it helped hone their offering. “We need to understand how people are integrating ESG, because it’s not necessarily done systematically,” Briand said. Worldwide, a shift in the ESG movement was underway, he said. Investors were moving from a “value-based” approach – in which certain industries, such as weapons manufacturing or pornography, were strictly off-limits – to an “integration” approach that took ESG risks into account – but did not set hard-and-fast rules about which companies were forbidden. Roger Urwin, known as Towers Watson’s global head of investment content, is an advisory director at MSCI. Speaking at the 2010 Association of Superannuation Funds of Australia Conference last month, he claimed sustainability to be “the number one investment theme in the decade ahead, and yet funds and managers are very poorly positioned for it”. Sustainability was a seam that had been broadly untapped by investors, he said.