MSCI has launched the MSCI ACWI Sustainable Impact Index and MSCI ESG Sustainable Impact Metrics -provided by MSCI ESG Research. The index has been designed to allow institutional investors to measure their exposure to public companies whose products and services help to address major social and environmental challenges. The index provider said the new framework aligns with the Sustainable Development Goals (SDGs) adopted by the United Nations in September 2015.
The framework was developed following a client consultation with more than 25 of the world's leading asset owners and managers, who agreed that there is room for new impact-oriented thematic investment approaches in public equity markets, according to Linda-Eling Lee (pictured), managing director and global head of ESG Research.
"To date, impact investing has largely been limited to small-scale, private equity strategies but there has not been a tool aiming to measure the extent to which exchange listed companies are involved in solutions for a more sustainable society and environment," said Lee. "The SDGs gave us the opportunity to offer tools to provide insight into what we define as Sustainable Impact."
The MSCI ACWI Sustainable Impact Index comprises companies that have at least 50% of their revenues tied to products and services that address environmental and social challenges through the five themes (basic needs, empowerment, climate change, natural capital and governance) grouped MSCI's ESG Sustainable Impact Metrics, while achieving minimum environmental, social and governance standards through their operations.
Eric Moen, director at MSCI's ESG Research, said the launch has "very good potential" from a product development perspective, given that the MSCI ACWI Sustainable Impact Index can be used for passive funds or structured products. "There is a growing demand from clients to invest in impact oriented investment themes in the public equity markets, and these new tools allow investors to identify companies that are providing solutions to environmental and social challenges," said Moen.
ESG has become a trending topic in the structured products market on the back of recent hefty transactions such as the first green bond linked to the Ethical Europe Equity Index in August 2014 by the World Bank, a €50m private placement with BNP Paribas Cardif, which was followed by six index-linked products within its Green Growth Bonds series - both institutional private placements and retail offerings, in Switzerland, Luxembourg and France, as well as in Asia (Hong Kong and Singapore) and the US.
In February 2016, JP Morgan, which licensed the iStoxx Europe ESG Select 30 Index in November to launch a product with the World Bank in the summer of 2015, rolled out JP Morgan Ethos Investments, a new sustainable investments platform for institutions and distributors looking for fully-customisable ESG investments, and announced a collaboration with S&P Dow Jones Indexes to launch a new range of ESG indices, including the S&P Europe 350 Climate Change LVHD Index.
According to Lee, historically, investors have used a number of investment approaches to address global environmental and social issues, including values-aligned investing, ESG integration approaches and impact investing. "By applying negative exclusions, Socially Responsible Investment (SRI), values-based investing and various divestment campaigns have targeted companies contributing to environmental and social problems," said Lee.
In contrast, impact investing approaches aim to generate a positive impact on society or the environment by directing capital toward companies that are providing solutions to social or environmental challenges. Unlike ESG integration, which uses extra-financial information with the ultimate aim of achieving long-term financial objectives, impact investing explicitly targets extra-financial goals alongside financial return.
The top five companies, by index weight, were Valeo (Pollution Prevention), Schneider Electric (Energy Efficiency), Pearson (Education), ABB (Energy Efficiency) and Vestas (Alternative Energy).
The MSCI ACWI Sustainable Impact Index outperformed the underlying ACWI benchmark by 1.7% points on an annualised basis from Nov. 2010 to Nov. 2015, showing that an investment of US$1m into a sample portfolio replicating the index 100% would have received US$181,203 in annual revenues from social impact solutions, as well as US$359,349 in annual revenues from environmental impact solutions.
The new index follows a report published by MSCI in March which looks at fund transparency and ESG quality of fund holdings.
The most popular ESG indices in the structured products market globally include the Solactive European Climate Change ESG Index; RBS Environmental Strategy Index and RBS Climate Change & Environment Index; SGI Global Environment; FTSE4Good Environmental Leaders Europe 40; as well as the iSToxx Europe ESG Select 30 and iSToxx Global ESG Select 100.
There are more than 3,000 live products featuring MSCI indexes globally.
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