RiskMetrics

Dodd-Frank Not Just About Banks: Conflict Mineral Reporting Requirements will Affect Chipmakers, Other Electronics Firms

Since its passage in July 2010, the Dodd-Frank Act has gotten a lot of attention, mostly for its sweeping new regulations affecting the financial industry. But buried in all those pages, in Section 1502 to be exact, is also a small provision aimed at addressing the problem of conflict minerals originating from the Democratic Republic of Congo (DRC). Along with requiring the US Secretary of State to develop a strategy to address the issue, Dodd-Frank requires companies under the jurisdiction of the SEC to report annually on whether they are using minerals from the DRC or its nine immediate neighbors. All companies must also report on the due diligence they have undertaken to verify their supply chain and avoid tainted metals. The SEC has until April 2011 to develop regulations to carry out this mandate.

In December 2010, MSCI ESG Research published an Industry Report on makers of semiconductors and related equipment. Along with other key ESG metrics, we looked at how the 34 firms in this space managed their supply chains. Our analysis included, in the wake of Dodd-Frank, an assessment of company efforts to keep conflict minerals out of their products. We found a wide variation in supply chain-related ESG risk exposure between leaders and laggards; click here to get access to the full report.

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'Corporate Environmental Management and Credit Risk': Moskowitz Prize Study Finds ESG Impact on Debt Costs

Each year, the winner of the Moskowitz Prize for scholarly research of socially responsible investing (SRI) is announced at the “SRI in the Rockies” conference. The 2010 Prize winner is “Corporate Environmental Management and Credit Risk,” by Rob Bauer and Daniel Hann. Their study found that companies with strong environmental records consistently pay lower costs for debt, while firms with weaker records face higher costs of financing and lower credit ratings.

SRI strategies have typically been focused on equity investing, but some believe that environmental, social and governance (ESG) metrics could help investors evaluate credit risk and quality. (See this Dec. 1 article from Citywire of the UK, and these 2009 comments from Ran Fuchs of MSCI.) The Bauer/Hann study appears to confirm the utility of ESG research for fixed-income investment.

Co-authors Bauer (former head of research at Dutch pension fund ABP) and Hann (a PhD candidate at Maastricht University) studied the environmental practices of 582 US firms between 1995 and 2006. Their performance data was drawn from the database of KLD, which is now part of MSCI ESG Research. Along with finding that a company’s environmental performance is associated with its cost of credit, Bauer and Hann also found that this association has grown stronger in recent years – a trend they expect to continue.

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Investors Seek More Disclosure by US Chamber of Commerce Members: Secrecy of Trade Groups' Political Spending at Issue

Earlier this month, a coalition of investors filed resolutions at four corporations whose members sit on the Board of the US Chamber of Commerce. The filers called for Accenture, IBM, Pepsi, and Pfizer to “review their policies and oversight of political expenditures, especially through trade associations,” according to a release by coalition member Walden Asset Management.

The Supreme Court’s January 2010 Citizens United decision explicitly permitted unlimited, anonymous political spending by private organizations, including unions and corporations. This decision has already sent waves of undisclosed money through the US political system. In the November elections, out-of-state oil companies spent millions on a California ballot proposition, while the Chamber spent almost $30 million on campaigns nationwide, according to BusinessWeek:
 

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'Green is the New Black': New Report, Free Webcast on ESG Risk in Apparel Retail Sector

On December 2, MSCI ESG senior analyst Olga Emelianova will present “Green is the New Black,” a webinar on environmental, social and governance (ESG) issues in the global apparel retail sector. While every business faces some universal ESG issues, some concerns are especially relevant to Adidas, The Gap, and their global sector peers.

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Global Sustainability Index Fund Wins 'Gold' Mutual Fund Award: Northern Trust's Fund is Based on MSCI ESG World Index

Earlier this month, Northern Trust announced that its Global Sustainability Index Fund (NSRIX), which tracks the MSCI ESG World Index, won the highest award in the first S&P Mutual Fund Excellence Awards Program. Of the 30 “Gold” winners, the NSRIX is the only one focused on ESG, and the only one whose constituents are passively determined by tracking an index.

The MSCI ESG World Index is a market capitalization weighted index of large and mid-cap companies in developed markets - North America, Europe and Asia-Pacific. The index is comprised of companies from the MSCI World Index that rate favorably relative to their sector peers in environmental, social and governance management performance based on analysis generated by MSCI ESG proprietary research.

The MSCI ESG World Index is one of 22 MSCI ESG Indices. Click here for more information.

ESG for Everyone: New SIF Trends Report Details Public Policy Drivers of SRI Growth

Earlier this month, the US Social Investment Forum (SIF) released its 2010 Report on Socially Responsible Investing Trends. The Report has been a standard reference for the American SRI market since the first was produced in 1995. (MSCI is one of two lead sponsors of the 2010 Trends Report.)

SRI has grown steadily over that period, and since 2007, its growth has accelerated dramatically. While total US assets under management grew less than 1 percent, sustainable/SRI assets expanded more than 13 percent over the past three years.

Along with other data to support this growth story, the Report also explores themes that deserve wider notice. These include the pivotal role played by institutional investors; the expansion of "positive" environmental, social and governance (ESG) integration methods; and how public policy changes are driving further ESG integration by investors – including those who aren’t explicitly “socially responsible.”

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Q&A with a 'Quant': A Pro's Perspective on ESG Integration into Mathematical Modeling

In a November 2 Wall Street Journal article, reporter Carolyn Cui wrote that “math geeks and altruists are forging unlikely alliances in the quest for better investment returns.” “Quants and Do-Gooders Unite” provided recent examples of the integration of environmental, social and governance (ESG) data into mathematical modeling of possible portfolio performance.

ESG factors are conventionally understood as “qualitative” attributes of a given business, rather than as comparative data that could tell investors how that business’s stock may perform. For example, a traditional socially responsible investor (SRI) might seek to avoid holding any companies that produce military weapons. For that investor, the only numbers needed are binary; a company either passes their “no weapons” screen or not.

Over the past 20 years, SRI/ESG research firms have sought to enable more subtle and granular analysis of corporate ESG performance. MSCI ESG Research progenitors Innovest and KLD developed comprehensive frameworks to generate comparative data across a spectrum of ESG indicators, from carbon emissions to executive compensation practices. IVA, Global Socrates, and the KLD Indexes (now MSCI ESG Indices) support both qualitative and quantitative approaches to portfolio construction.

While Ms. Cui’s article highlights the novelty of “math geeks and altruists” working together, such détente isn’t without precedent. In 2005, KLD worked with Barclays Global Investors to create an exchange-traded fund based on what is now called the MSCI KLD 400 Social Index.

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Coal Industry a Factor in Midterm Elections: Federal Policies Could Literally Reshape West Virginia

The 2010 midterm elections have provided plenty of political theater, and one of the strangest scenes may be West Virginia Governor Joe Manchin firing a rifle at a “cap and trade bill.” An October 27 Boston Globe article explored how Gov. Manchin, a Democrat running for Senate, has positioned himself to the right of his party on many issues. The political logic behind his animus towards climate legislation can be summed up in one word: coal.

Gov. Manchin is a vocal – and, apparently, armed – supporter of the coal industry’s positions on climate change and mountaintop coal removal (MTR). As a Governor, however, he can only do so much, as key parameters of coal mining’s regulatory framework are set by the US government.

MSCI ESG Analyst Sam Block researches the coal industry, and as he explains below, federal regulation of coal mining can change drastically depending on which party is in power. If Republicans retake one or both houses of Congress, they could counter the EPA’s anti-MTR efforts under President Obama. Complicating the issue is that other Federal agencies, as well as the courts, also have a say in how the coal industry is regulated.

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US Gov't Revising Nutritional Guidelines: Food Industry Marketing a Factor in Rising Childhood Obesity

Every five years, the federal government reviews and adjusts its dietary recommendations for Americans. The latest revisions, which will be released in December, are being developed amidst alarm over childhood obesity rates. Children in the US and other nations are heavier than ever, and public health experts are asking why.

One suspected culprit is the packaged food industry, because of the kinds of products that it markets directly to children. Recent industry initiatives, while welcome, haven’t done enough to get empty calories out of the American childhood diet.

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'Our Judgments are Shaped by Facts and Experience' MSCI ESG Analyst Sharon Squillace on the Newsweek Green Rankings

The current issue of Newsweek presents the 2010 Green Rankings of the 500 largest US companies, and the 100 largest companies worldwide. This is the second annual Green Rankings, and like last year, MSCI ESG Research was a core provider of research and analysis for the project. Joel Makower at Greenbiz.com writes that the Green Rankings have “become a major metric in corporate America.” He describes how, in a recent meeting with 30 corporate sustainability officers, almost all of them knew their firms’ positions on the list.

Mr. Makower also provides some points to keep in mind as we compare one company’s ranking to another’s, and compare this year’s list to last year’s. He explains that the methodology changed somewhat since last year; that the scores are normalized so that a “100” score doesn’t indicate perfection, but rather than a firm has done comparatively better than all others; and that there is some “subjectivity” behind the analysis and rankings of each company.

Sharon Squillace, the MSCI ESG Research Analyst responsible for the Green Rankings project, offered to explain some of the thinking behind the Rankings methodology. She writes that the availability of accurate performance data by researched companies helps temper the “subjectivity” of a firm’s Green Ranking:

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