In an unusual move for an index provider, MSCI Inc. is urging the investment industry as a whole to incorporate environmental, social and governance issues into their investment processes.
“Really we think there’s an urgency,” says Remy Briand, head of ESG at MSCI. “We think there are still too many investors that are not realizing that, essentially, they have to move towards ESG integration, move fast and move in scale. So we feel there’s a need to act now and it may not be as clear to everyone as we think it should be.”
The organization’s recommendations outlined three core principles of ESG integration. Firstly, it suggested that asset owners integrate ESG considerations into how they establish, monitor and revise their overarching investment strategy and capital allocation.
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Further, MSCI recommended that portfolio managers include ESG considerations in every stage of portfolio management, whether that’s selecting securities, constructing the portfolio, managing risk, performance attribution or reporting to clients. Finally, it suggested that, when research analysts examine corporate fundamentals and provide investment recommendations to portfolio managers, they consider ESG issues, including how companies are rated on ESG.
“We feel there is a convergence of a number of trends that are pushing towards more action,” says Briand. “Clearly, the discussion on climate is very different now than a few years back. The end clients, whether it’s an individual or a pension fund, realize more and more that they need to act. But there are still a lot of investors who still either say, ‘It’s not my problem,’ or say they just don’t want to hear about it. We think that’s going to be less and less accepted, and there’s also a need to concentrate on really doing integration.”
Investors’ role of either allocating or re-allocating capital will have a direct impact on the success of mitigating the negative affects of climate change and the transition to using less carbon-intensive practices worldwide, he says.
“As investors, you can either choose to find projects to fund more oil and gas or you can find companies that are going to help manage the transition towards a low-carbon economy. Those are choices that have very direct consequences in terms of funding, cost of capital. And right now, it’s not clear to every single fund manager or pension fund that it’s their problem, or in a more positive way, that they are directly part of the solution.”
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