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Integrating ESG into the Investment Process - Remy Briand
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Integrating ESG into the Investment Process - Remy Briand


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  • MSCI ESG Research is the successor to KLD and Innovest. At MER, our goal is to change the way investors manage moneyWith one of the largest research staffs in the world, we have achieved a scale that enables us to specialize in data and analysis – and is global in scope, global in the location of our teamsMSCI is a PRI signatory, and is directly engaged in the benchmarking project and fixed income workstreams
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    • 1. Integrating ESG into theInvestment ProcessRemy Briand, Managing Director & Global Headof Index and ESG Research, MSCI
    • 2. Potential Approaches to ESG Integration Investors interested in ESG integration could adopt one or several potential approaches in their investment process based on their expertise (‘competitive advantage’) and resource constraints (‘governance budget’), including: Reflecting Constraints of Universal Owners Ensure Multi-Period Sustainability Mitigate impact of Risk mitigation Portfolio externalities Within Portfolio Introduce a judicious targeted Construction Introduce a capital allocation to public/private allocation framework to markets to investments that public markets with an represent longer term ESG tilt to mitigate alternative to mitigate system externalities that will be wide externalities. E.g. clean Integrated ESG/Tilting Targeted/Thematic internalized in a tech diversified portfolio Collaborate to improve Develop a value system via network effect and Outside Portfolio proposition from active Active Ownership Collaboration Construction scales so that investors ownership & engagements but collectively can achieve better pragmatically reflecting outcomes. E.g. lobby for appropriate view of cost regulatory changes and benefits You can’t sell so System improvement you ought to care 2
    • 3. Potential Integration Approach for Asset Managers A potential intermediate implementation for asset managers could include:  Policy statements: A policy statement that reflects the managers’ understanding of asset owners’ objectives typically along the dimensions of ‘Universal Ownership’, ‘ESG risk’ or ‘values-driven criteria’. This statement would also define ex-ante what is expected from the ESG investment strategy: increase the ESG profile of a portfolio, reduce risk, engage companies for real changes etc.  Risk management strategy: A risk management strategy that requires a systematic review of lowly-rated companies. It could take the form of an explicit written justification to invest or a formal discussion at the investment committee level. The overall level of risk could also be monitored, possibly by establishing a maximum requirement on the number of lowly-rated companies in the portfolio or an aggregate portfolio ESG score that is not lower than the market benchmark. A precise integration would also lead to an attempt to benefit from potential opportunities or mis-pricing by requiring analysis for ESG risk and opportunities from the “financial analyst team”.  Engagement and voting policy: A well-defined engagement and voting policy that articulates the manager’s views on key ESG issues. Setting a realistic scope and level of ambition for engagement is critical to attaining objectives within the constraints of time, cost, and resources. In formulating a company’s engagement and voting policy, investors can identify a list of key ESG issues most relevant to them and use it to identify and prioritize engagement targets. It is also important that investors continuously monitor results of their engagement interactions and take appropriate actions should their engagement actions fail. 3
    • 4. ESG Portfolio Analytic Framework ESG risk can be measured Portfolio MSCI World ESG Portfolio MSCI World ESG at portfolio level by Index/Portfolio Level Portfolio Scores Relative ESG Scores +0.15 +0.32 Environment Relative ESG Scores +0.14 +0.22 looking at the aggregated Risk Factors +0.09 +0.32 risk exposure. [+] Key ESG Pillar Environment +0.14 +0.22 Environmental Management Capacity Opportunity +0.06 +0.27 +0.25 +0.08 This analytical framework Social +0.14 +0.35 Governance +0.22 +0.26 allows the investor to Human Capital Health & Safety +0.17 +0.07 +0.31 +0.32 better measure the [+] ESG Scores by Sector Labor Relations +0.50 +0.42 portfolio performance Energy Materials +2.53 +0.08 +1.06 +0.34 Employee Motivation & Development -0.06 +0.20 against its benchmark Industrials Consumer Discretionary +0.10 -0.03 +0.21 +0.83 Stakeholder Capital +0.11 +0.38 universe. Consumer Staples -0.23 +0.92 Product Safety +0.29 +0.31 Health Care +0.17 +1.08 Supply Chain -0.29 +0.28 The core portfolio of a Financials Information Technology +0.36 +0.79 +0.69 +1.38 Customer/ Stakeholder Partnerships Local Communities +0.12 +0.24 +0.45 +0.73 UNPRI signatory would Telecommunication Services +0.60 +0.15 Intellectual Capital/ Product Development +0.21 +0.13 typically lie between the Utilities +1.80 +0.85 market average and the Distribution by Rating Band Strategic Governance +0.22 +0.26 ‘best-of-class’ index. A [+] AAA - A [+] BBB - B +10.9% -5.8% -2.1% +4.9% Traditional Governance Concerns Strategy +0.32 +0.16 +0.08 +0.69 sustainable fund would [+] CCC -2.2% -0.4% Strategic Capability / Adaptability +0.18 +0.01 typically be close to or Notes : better than the best-of- 1. A pos i tive rel a tive ESG s core i ndi ca tes a n a bove a vera ge ESG performa nce vers us the ma rket benchma rk (MSCI Worl d) a nd vi ce vers a . 2. The MSCI Worl d ESG Index i ncl udes compa ni es wi th the bes t-of-cl a s s ESG performa nce. class index. Note: In measuring and attributing ESG risk, it is important to use relevant reference benchmarks. We suggest considering measuring the Measurable improvement portfolio against two benchmarks: a broad market cap weighted index such as the MSCI World Index or the MSCI ACWI IMI which will reflect the state of the market without ESG integration and an ESG benchmark such as the MSCI World ESG Index which selects companies targets can then be set with ‘best- of-class’ ESG management. For investors who aim to reflect certain values in their investment process a ‘values-based ESG benchmark’ such as the MSCI World Socially Responsible Index could also be considered. and tracked through time 4
    • 5. Company-level ESG Assessment At security level, ESG ratings and scores can also be used to highlight holdings that are contributing most to the risk of the portfolio: 1. Companies with the lowest ESG scores 2. Companies that are exposed to major ESG controversies 3. Companies that are involved in business activities that may be considered unethical by some investors This information can serve as a communication tool to highlight potential reputational risk, facilitate portfolio monitoring and formulate active engagement strategies to address specific ESG issues 5
    • 6. ESG Research, Analysis, Ratings and Indices - Introducing MSCI Provides products and services to MSCI ESG asset managers Research*: and asset owners MSCI is the only Global staff of MSCI Inc. is a A new business worldwide: major index 130+, including signatory to the unit established - ESG risk ratings provider with in- more than 85 Principles forin 2010 based on house ESG research and data - Impact analysis Responsible the legacies of research and analysts. Investment. KLD (1988) and - Screening data expertise. Innovest (1998). - Custom research - Indices MSCI ESG Research and Indices - A Holistic Offering*Certain products and services of MSCI ESG Research, including products and services utilized in MSCI ESG Indices, are provided by Institutional Shareholder Services Inc. ("ISS") and/orKLD Research & Analytics, Inc. (“KLD”), which are both indirect wholly-owned subsidiaries of MSCI. 6
    • 7. MSCI ESG Global Client Service Americas + 1.212.804.5299 Asia Pacific + 612.9033.9339 Europe, Middle East and Africa + 44.207.618.2510 7
    • 8. Notice and Disclaimer  This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCl Inc. or its subsidiaries (collectively, “MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the “Information Providers”) and is provided for informational purposes only. The Information may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI.  The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used to create indices, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services.  The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.  Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or wilful default of itself, its servants, agents or sub-contractors.  Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results.  None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy.  MSCI’s indirect wholly-owned subsidiary Institutional Shareholder Services, Inc. (“ISS”) is a Registered Investment Adviser under the Investment Advisers Act of 1940. Except with respect to any applicable products or services from ISS (including applicable products or services from MSCI ESG Research Information, which are provided by ISS), none of MSCI’s products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and none of MSCI’s products or services is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.  The MSCI ESG Indices use ratings and other data, analysis and information from MSCI ESG Research. MSCI ESG Research is produced by ISS or its subsidiaries. Issuers mentioned or included in any MSCI ESG Research materials may be a client of MSCI, ISS, or another MSCI subsidiary, or the parent of, or affiliated with, a client of MSCI, ISS, or another MSCI subsidiary, including ISS Corporate Services, Inc., which provides tools and services to issuers. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indices or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body.  Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, ISS, CFRA, FEA, and other MSCI brands and product names are the trademarks, service marks, or registered trademarks or service marks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor’s. “Global Industry Classification Standard (GICS)” is a service mark of MSCI and Standard & Poor’s. © 2011 MSCI Inc. All rights reserved. RV May 2011 8