MSCI recently reached a milestone in its ESG research development story, which began last year when the New York–based provider of investment indexes and research acquired RiskMetrics Group and inherited a suite of leading providers of ESG research. (ESG is shorthand for environmental, social and corporate governance.)
Late last month, MSCI introduced ESG Manager, its latest research delivery platform. What does the rollout of this platform — which seeks to integrate a handful of ESG research products into a single interface — tell us about where ESG research in general is headed as it consolidates, standardizes and matures?
Noel Friedman, head of business development at MSCI ESG Research, concedes that the MSCI acquisition of RiskMetrics, a provider of risk management and corporate governance products, wasn’t driven by RiskMetrics’ ESG offerings. But Friedman says MSCI quickly realized that its new ESG unit conveniently addressed a growing client demand for such research, and MSCI has since devoted resources to improving and building up its collection of ESG tools.
“RiskMetrics’ ESG business included independent providers of ESG research — Innovest, KLD and IRRC — all under this umbrella, and the result of improving and consolidating and integrating those products is the launch of ESG Manager,” Friedman says.
The new ESG Manager suite consists of three products (one of them not yet released) that provide some insight into how MSCI developers think about the key needs of ESG-concerned asset managers. One of these products is business involvement screening research that allows users to create the types of negative screens that characterized socially responsible investing (SRI) when it first emerged several decades ago: An investor categorically filters from his or her portfolio any company involved with activities that conflict with a given set of values (common screens exclude tobacco products, weapons and alcohol).
MSCI’s ESG Impact Monitor is the second major piece of ESG Manager. This product evaluates companies’ impacts on society and the environment and flags violations of agreed-upon social norms and conventions like the United Nations Global Compact. It also alerts users to companies’ involvement in and proximity to controversies and assesses company efforts at damage control when that involvement or proximity becomes a problem. Rather than being used for blanket negative screens, this tool is more likely to be used by asset managers who are concerned about reputational risk and want to set thresholds for when they should divest — either because they fear that the reputational risk could befall them directly or simply because it could affect the portfolio via a company’s dampened share price. Impact Monitor could also be used to zero in on problem companies with which managers opt to launch engagement campaigns, or to try to improve bad behavior.
Impact Monitor currently covers the more than 2,000 companies in the MSCI world index, and in September it will expand its coverage to the MSCI emerging-markets index. Later this year, MSCI’s ESG ratings also will be integrated into ESG Manager.
Is ESG Manager’s collection of tools biased toward an ESG strategy that relies on negative screens? At a recent webinar in which MSCI introduced and demonstrated ESG Manager, one participant asked whether the platform includes tools for managers who would rather positively screen based on ESG factors — in other words, zero in on the ESG stars, not just the ESG losers. Friedman’s response to this line of questioning is that yes, the ESG research products that MSCI inherited with its RiskMetrics acquisition were largely meant to be used for exclusion and negative screening, and that is reflected in ESG Manager’s current offerings. But, he says, a tool like Impact Monitor can be used to unearth ESG-healthy companies just as easily as it can be used to find those that have been flagged. He adds that as MSCI continues to build ESG Manager, it will include functionalities that allow for more-nuanced positive — and negative — ESG screening. If MSCI expects to keep up with the innovation and myriad approaches rushing out of the ESG investment world these days, it will certainly have to.
