Get the message
The main benefit of this research is the message it sends out to management and investors that ESG factors matter. Done properly they can improve risk-adjusted returns.
“If enough investors get on board with this research and invest more in companies with good ESG records, then that is going to have an impact on share prices,” Bell says.
It can also have a positive effect in that a company’s cost of capital will fall. “So it suggests that it is important for people to take these factors into consideration both as investors and when running companies,” Bell adds.
Salarbux adds that the research sends out a strong message that when you assess companies you have to look beyond the traditional financial metrics.
The challenge is to have reliable and available data of non-financial risk to see which companies are exposed to long-term sustainable trends and the long-term macro perspective.
Whatever the conclusion that asset owners and senior managers read into this research, for Newton this is an investment trend that is unlikely to fall out of fashion.
“Studies suggest that the next generation of investors are more interested in engagement in the environment and the impact that companies have on the world than the older generation,” Bell says.
“As that comes through, you will see increasing pressure on asset owners and investment managers to take more account of these factors.”
Whatever conclusion institutions read into MSCI’s findings, Giese believes that the report is a game changer for ESG.
“A decade ago ESG was a difficult field, even five years ago it was considered niche. “It has changed in the past few years,” he adds.
“We have seen enormous in-flows going into ESG. For example, the assets tied to our ESG indexes, in terms of people tracking the ESG index or launching an ETF, have quadrupled in the past two years, so it is exponential growth.
“The reason for that is that there is now a lot of evidence that ESG can help performance. The evidence is not only there in terms of research papers but also our ESG Leaders Index has an eight year track record.
“With an eight year track record people are comfortable to say that this works, ESG helps to make portfolio returns more resilient and now we see that flows are coming in,” Giese says.
Whatever happens following the publication of MSCI’s report it clear that change is in the air for attitudes to ESG and the early adopters could be among the biggest beneficiaries of picking stocks on the financials alongside non-financial data.
“It is called ESG now, but maybe in 20 years it won’t be called ESG it will just be called investing, because that will be the right way to do it anyway,” Salarbux says.
“Mangers who have a framework today, we’ve had one for about 22 years now, will have a significant advantage in that respect,” he adds.
