Index and analytics provider MSCI recently unveiled ratings for 32,000 funds, including exchange-traded funds (ETFs) ibased on their exposures to long-term environmental, social and governance risks and opportunities.
According to MSCI, assigned ratings range between a best-of-class AAA to CCC. The ratings scale is based on the weighted average score of a fund’s holdings, an assessment of the fund’s ESG track record and lastly, a review of its ESG tail risk.
“It is designed to provide investors with greater transparency to better understand the ESG characteristics of fund and ETF components of their portfolios,” said Remy Briand, MSCI’s head of ESG. “As the number of ESG funds proliferate and ESG-orientated investment options and ESG strategies are being adopted by wealth and fund managers, we strive to provide the tools and solutions to help these investors better understand ESG risks.”
Report Demystifies ESG
While ESG is still trying to break through to the mainstream in the financial realm, but a new research report from Corbin Advisors helps to clarify common misconceptions for institutional investors and corporate executives.
The Corbin research, based on data from an ongoing study comprising 500+ institutional investors and nearly 100 Investor Relations Officers at top U.S. companies found that:
- 76% of investors assert ESG has become a greater factor in their investment process over the last two years.
- 73% report the “G” is important to critical to their investment decisions, compared to only ~30% for the “E” and “S.”
- 48% of investors identify Data Quality/Access, particularly for Small-caps, as the top frustration when it comes to ESG factors.
- Over 75% of IROs report they have identified material factors impacting their company.
The research, conducted in concert with the University of Connecticut, also identified several key takeaways for companies looking to better integrate ESG factors into company performance measurement and operations:
- ESG reports are one input for investors in their comprehensive research approach; a low ESG score will not necessarily result in a sell decision
- ESG is not a one-size-fits-all approach; it is critical to identify materiality factors for your industry and then conduct the same analysis for your company based on key stakeholder views
- While resources and budgets are more challenging for small-caps, it is critical to communicate where you are in your ESG journey; investors are looking for progress, not perfection
An ESG ETF to Watch
One ETF to consider is the Xtrackers MSCI USA ESG Leaders Equity ETF (NYSE Arca: USSG), which was developed in collaboration with Ilmarinen, Finland’s largest pension insurance company. The expense ratio for USSG is 0.10%, which is well below the average cost of 0.39% for ESG funds, making it ideal for investors who are also seeking a low-cost solution to add ESG to their portfolios.
USSG seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI USA ESG Leaders Index. In order for companies to be included in the fund, the methodology includes a comprehensive screener that filters out alcohol, weapons, gambling, and other controversial products or activities.
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