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Quantifying ESG impact facilitates sustainable investing

MSCI ESG and fund ratings can help investors ensure their portfolios are aligned to sustainability objectives, said the company.
Chitra Hepburn, MSCI

As more fund managers integrate ESG into their processes, investors are increasingly demanding more transparency in disclosure and enhanced regulation in order to gain a better understanding about what they invest in and how they are making an impact.

To enhance transparency, MSCI said it has made thousands of companies’ ESG ratings publicly available on their website to allow people to make an easier judgement on where the companies are in terms of sustainability.

“MSCI ESG ratings use a rules-based methodology to identify industry leaders according to their exposure to ESG risks, and how well they manage those risks relative to their peers,” said Chitra Hepburn, managing director and head of ESG, Apac, MSCI, at the Global ESG Summit, hosted by Bonhill Group, owners of Fund Selector Asia.

“Our methodology is to focus on identifying the most relevant risks by sector. We record these forward-looking management data, how they are managed, and we look at incorporating alternative data sources together with company disclosed data.”

About 45% of the data used in the ratings must be from an “alternative data set”, including those obtained from government bodies, regulators, or academics.

Comprehensive tool

The MSCI fund ratings, on the other hand, measure the resilience of mutual funds and ETFs to long term risks and opportunities arising from ESG issues.

The rating indicates a quality score and fund peer group average for comparison purposes, and MSCI ranks the funds from triple-C to triple-A.

The tool also highlights a fund’s exposure to controversial business involvements such as weapons and tobacco, environmental and social impact, and ESG risks.

It shows how close the fund is to ESG leaders or laggards, and whether it is on a positive ESG trajectory, according to Hepburn.

“The rating can also identify the top ten fund holdings in terms of sustainable revenue impact,” she added.

Hepburn also gave some advice for investors who invest in ESG funds.

“If the data is not very transparent, you should ask for the carbon intensity or carbon footprint, and its exposure to fossil fuels,” she said.

“Other aspects [to monitor] include ESG fund rating quality score, exposure to leaders and laggards, carbon risk, gender diversity, and sustainable impact solutions.”

The MSCI rates over 14,000 issuers and 680,000 securities on their ESG ratings, accounting for 90% of the equity and fixed income market value, according to Hepburn.

The MSCI provides a series of tools to help investors navigate net-zero, including the Climate LabNet-Zero Tracker, and Implied Temperature Rise, and the Carbon Footprinting of Private Equity and Debt Funds

Part of the Mark Allen Group.