What is driving growth today in sustainable investing? How can advice firms demonstrate value to their clients here? And what is making some advisers wary of talking about sustainable investing or ESG? Naomi English, Head of ESG Product Strategy at global giant MSCI, delivered a timely keynote at the 2021 Dynamic Planner Conference, answering those questions, among others. Below, are highlights of what she discussed alongside a video recording of her March talk in full. You can catch up on the full recording here.

What has driven growth in sustainable investing?

Over the past decade, we have seen tremendous growth in ESG investing globally, with an even greater acceleration last year in 2020. Growth was particularly pronounced in Europe and there are many reasons behind that. I would like to focus on two.

First, there is a better understanding today of the relationship between ESG and financial performance. We have seen that companies with high ESG ratings have been more profitable and paid higher dividends to shareholders, and that portfolios which have integrated ESG considerations have demonstrated more resilience than portfolios which have not.

On top of that, hundreds of different academic and practitioner studies have looked at the relationship between ESG and financial performance, allowing us to confidently say that the myth that incorporating ESG into your investments will hurt performance is simply that, a myth.

Second, investors are more aware of events today and less tolerant of corporate ESG incidents. More than 30 years ago, the share price of Exxon barely moved in the wake of the 1989 Exxon Valdez oil disaster. Today, there are example after example of companies, which have faced serious financial repercussions following corporate ESG incidents. Companies cannot get away with it today. There is a financial price to pay.

How can advisers demonstrate value to their clients?

It’s not only institutional investors who are changing, but individual investors too. According to studies, 84% of millennial investors are interested in sustainable investing, alongside 71% of overall individual investors today.

Naturally, those investors are looking to financial advisers to see how they can help them invest in alignment with their values. ESG investing insight is insight clients want and by providing it, advisers can demonstrate their value. They can further do this by strengthening clients’ portfolios by incorporating ESG; they can align portfolios to their clients’ values; and they can enhance their annual client review process, by providing meaningful insight here.

Some advisers may say, ‘Oh, only a small number of my clients ask about ESG’, but equally in that regard advisers are not waiting for their clients to ask them about increasing exposure to China in their portfolio, for example. Ultimately, investors look to their advisers to advise them and help them navigate global trends and risk.

Why are some advisers wary of discussing ESG?

First, they may be uncomfortable talking about it because they feel they lack the expertise. Second, there is existing confusion about ESG investing and whether it can really reflect a client’s values or an investment strategy.

ESG does mean very different things to different people. There is no one size fits all. For example, let’s say 50% of a company’s power use is generated by nuclear power. That could be a positive or a negative for a client, so it is very important for an adviser to understand their clients’ individual objectives, in respect of aligning personal political and ethical values with their portfolio and to understand their investment objectives.

A client may wish to align their portfolio with ESG preferences somewhat irrespective of performance. They may wish to see measurable environmental and social returns – sustainable investment impact – alongside financial returns. Those are individual objectives. When we turn to look at investment objectives, we are looking at the integration of ESG into portfolios to enhance long-term returns.

The methodology behind MSCI’s ESG research

The MSCI ESG research ratings go from a AAA, a leader, to CCC, a laggard. And not all issues are relevant for all industries. At MSCI, we use quantitative metrics to determine which are most relevant for an industry.

MSCI was the first ESG provider to assess companies based on the idea of ‘industry financial materiality’, which is really core to our approach. We have identified 35 potential ESG issues across all industry, but for each industry we only select between four to seven of them and we dive deep on those issues and give each an appropriate weight before reaching an overall rating.

Our analysis does not only look at the past but is forward-looking as well. It does not rely purely upon company disclosure, thus allowing our ratings to measure possible risks not captured by traditional financial analysis.

In Dynamic Planner, you can view and download PDF reports of analysis of funds, containing lots of information and allowing you to dive in and evaluate funds in respect of values alignment, sustainable impact and risk exposure.

What makes MSCI’s ESG ratings unique?

  1. MSCI is a pioneer here with the deepest ESG history.
  2. The MSCI ratings have been used by more studies than any other.
  3. The ratings have recently been found to best predict ESG news on material ESG issues and future stock returns.
  4. The ratings were the first to adopt a forward-looking financial materiality approach and have continued to innovate and refine their approach over the last decade.
  5. They don’t rely purely upon company disclosure, with 45% of data used being alternative data.
  6. Ratings use a common language to assess ESG performance and are transparent, helping set industry standards.

Learn more about MSCI sustainable investing research in Dynamic Planner.