It’s no secret that environmental, social and governance (ESG) is slated for exponential growth in the capital markets, but index provider and analytics company MSCI is expecting ESG indexes to outsize traditional indexes.
As it currently stands, MSCI has 37 ESG-related gauges versus 1,000 for traditional stock and bond indexes, but expect that disparity to change over time. Remy Briand, head of ESG at MSCI, expects assets under management following the company’s ESG gauges will likely double in 2020, according to a Bloomberg Green report.
Furthermore, the report noted that “‘Do-good’ investing has picked up globally, with at least $30.7 trillion held in sustainable or green investments in 2018, according to the Global Sustainable Investment Alliance. This has proved to be a lucrative business opportunity for index providers, with MSCI’s ESG benchmark revenue likely growing between 60% and 65% to $38 million in 2019, according to Morningstar Inc. analyst Colin Plunkett. Its operating revenue for the overall index business was $921 million last year, up 10% from 2018, MSCI said Jan. 30.”
The ESG Factor in Smart Beta
As ESG continues to become a force in the investment arena, it could become a factor. In the realm of smart beta investing, ESG could join value, growth, momentum, and other factors sometime in the future.
An article in Funds Europe posed an interesting question: “Nearly half of institutional investors had some form of ‘smart beta’ allocation last year and, separately, research also showed that ESG growth among the world’s largest asset managers was soaring. But could the two – smart beta and environmental, social and governance investing – be combined as a type of investment factor?”
“There is a very strong appetite for ESG combined to smart beta in funds,” said Bruno Taillardat, head of smart beta and factor investing at Amundi. “Smart beta funds rely on well-structured and disciplined investment processes.”
Furthermore, ESG could be used in concert with other factors like value and growth.
“We also hear that some investment factors react better than others to having an ESG filter applied to them, with ‘quality’ being well-matched with ESG,” the Funds Europe article noted. “The quality factor tends to favor companies with large profits relative to their asset base, says Eugene Barbaneagra, portfolio manager for the traditional strategies group at SEI, who adds that ‘having a high-profit base tends to allow a company to afford to mitigate a lot of ethical issues.’ Style Analytics found that ESG factors can be added to the momentum investment factor with ease – and doing this has also been shown to produce higher returns.”
DWS has partnered with MSCI Inc. to launch a number of ESG-themed ETF strategies to help investors find a more readily accessible means to tap into this investment methodology. For example, the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG) has been a popular play for investors seeking exposure to socially responsible investments. USSG was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The underlying MSCI USA ESG Leaders Index provides exposure to large- and medium-cap U.S. companies with high environmental, social and governance (ESG) performance relative to their sector peers.
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