Screening

MSCI ESG Screener Notification - Release of MSCI ESG Manager 1.0

MSCI ESG Research has released an improved version of the MSCI ESG Screener platform. In recognition of the expanding suite of MSCI ESG Research products and components, the Screener application has now been renamed MSCI ESG Manager, with Screener becoming one core component of the MSCI ESG Manager platform.

'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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WSJ Takes on CSR, But Who Are They Talking About? The Problem of Agency in Parsing Punditry

On August 23, the Wall Street Journal published an editorial by Dr. Aneel Karnani that questioned the value of corporate social responsibility (CSR). His argument was directed against “pleas” and “appeals” for executives to “act voluntarily in the public interest and against shareholder interests.” He called CSR “irrelevant or ineffective,” an “illusion, potentially a dangerous one.” A reader unfamiliar with the term might surmise that CSR is actually a dangerous chemical, like DDT.

The socially responsible investing (SRI) community, as expected, took issue with Dr. Karnani’s column. Social Investment Forum (SIF) CEO Lisa Woll wrote to the Journal, countering the polemic with real-world evidence about the positive impact of corporate sustainability efforts. (With permission from SIF, Ms. Woll’s letter is printed in full at the bottom of this article.)

Besides its empirical shortcomings, Dr. Karnani’s case also betrays a methodological flaw that is both common, and instructive: While we can tell what he takes issue with, it’s never quite clear who he’s talking about. Here is the plainest statement of his thesis about corporate social responsibility:

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MSCI ESG Indices: Building on 20-year Track Record of KLD

Since the 2009 acquisition of KLD by RiskMetrics – and the subsequent 2010 sale of RMG to MSCI – we KLD alums have fielded many questions about the future of our legacy businesses.

I’m happy to report that MSCI has made a concrete commitment to the ESG index business. Below is the text from this week’s announcement introducing MSCI ESG Indices. This also includes a table of the Indices’ new names.

If you’d like to learn more about the 20-year history of the KLD index business – the first of its kind in the world – take a look here:  http://www.kld.com/about/20years/

Also see these ESG Insight articles on this topic:

Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of ‘SRI as a Free Good’

The Impact of ESG Integration: A Roundup of Research on Risk and Returns

Passive Strategies for ESG Investing: An Overview from Index Universe

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ESG Investing Can Restore the Legitimacy of Financial Markets: Pax World's Joe Keefe Addresses Boston Fed

In recent months, ESG Insight has, unfortunately, had plenty of bad news to write about. From the risks of coal mining to BP's safety practices to conditions in Chinese factories, longstanding environmental, social and governance (ESG) issues have become front-page news.

These crises, in their pathos and urgency, have shifted public attention away from what had been The Crisis: the collapse and tentative recovery of global financial markets. We have considered ESG perspectives on the financial crisis since it first made headlines, in fall of 2008. Some socially responsible investors (SRI) saw signals of trouble before it surfaced, as in the case of subprime lending.

From the ESG perspective, the crisis came from “short-termism” – a confluence of quick trading, information asymmetry and conflicts of interest among market players, and a deceptive diffusion of risk. Risk flowed from subprime “liar loans,” to mortgage-based securities that were speciously rated “AAA,” to seemingly stable investors worldwide. The resulting gusher of paper wealth came suddenly; in retrospect, it’s not surprising that it vanished just as fast.

Perhaps the ESG/SRI perspective can help build a less volatile, more resilient, more realistic global economy. Sustainable and socially responsible investors should ask: If short-termism was so contagious, can a focus on long-term value creation also spread throughout the global economy?

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Dan DiBartolomeo and Lloyd Kurtz on the KLD400 Social Index: 20 Years of "SRI as a Free Good"

The FTSE KLD 400 Social Index (KLD400) celebrates its 20th anniversary this month. The world’s first benchmark index constructed using environmental, social and governance (ESG) factors, the KLD400 sparked a new era of responsible investing, helping transform the field from a small niche into today’s $6.7 trillion global market. [Source: Eurosif 2007] Since 1990, the KLD400 has outperformed the S&P 500, proving that a portfolio constructed using ESG criteria can, over the long term, deliver competitive risk-adjusted returns.

Dan DiBartolomeo and Lloyd Kurtz, who was one of the original KLD employees apart from the firm's founders, have studied the risk and return characteristics of socially screened portfolios over the past two decades.

Dan and Lloyd spoke to us about the KLD400’s contribution to mainstream investing, how SRI has evolved over the past 20 years, and some of the challenges that remain. [Ed. Note – Biographical info for Dan and Lloyd can be found at the end of this interview.]

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Congress Pushes Obama on Iran: Rising Political Pressure Not Just About Oil, Nukes

At last week’s nuclear security summit, President Obama “issued a specific warning” to the Iranian regime, the New York Times reported. The President is working to secure United Nations Security Council support for new multilateral sanctions and penalties against Iran unless it curtails its nuclear weapons program.

Even if other nations decline to join the President’s effort, the climate for Iranian trade could change markedly. Both houses of Congress have passed bills that will build on the existing Iran Sanctions Act (ISA), which was passed in 1996. State legislatures are also increasing pressure on businesses that trade with Iran. Oil and technology companies have already been affected by these moves, giving a glimpse of possible dislocations to come.

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Massey is Not Alone: Weak Safety Records a Risk for Other US Coal Mining Firms

The first response to the Upper Big Branch (UBB) mine disaster has been, as it should be, a massive effort to help its victims and their families in and around Montcoal, West Virginia. But looking beyond the immediate human tragedy, many are considering the implications of the disaster for UBB owner Massey Energy and the American coal sector as a whole.

The Associated Press and others have reported that, while Massey shares have plummeted in value this week, some of its US competitors have benefited. Some investors believe that these companies will take market share from Massey and avoid the consequences of that firm’s poor safety record.

This conclusion, while understandable, may be mistaken. A review of major Appalachian coal mining firms shows that, compared to their global sector peers, their employee safety practices are subpar. Investors and lenders who are now leery of Massey should consider that its closest competitors may harbor serious risks as well.

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ESG 'Active Owners,' Like Norway, Have Better Control of Investment Horizons

Responsible Investor has reported that Norway’s sovereign wealth fund is stepping up its engagement with the companies whose shares it owns. In some cases, Norges Bank’s Global Pension Fund will opt for “active ownership” of a company that violates its ethical norms, rather than avoiding the stock entirely. Engagement “might reduce the risk of continued violations of ethical norms better than exclusion, which leaves the fund with no influence once shares are sold,” wrote RI’s Hugh Wheelan.

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US Steps Up Extra-Territorial Bribery Prosecutions: A Survey of the Foreign Corrupt Practices Act

On February 19, Bloomberg reported that Alcatel-Lucent “agreed to pay $137.4 million and change internal procedures to avoid U.S. prosecution for alleged bribes paid in Costa Rica, Taiwan and Kenya, according to a company regulatory filing.”

This settlement is part of a “serious crackdown” on violators of the US Foreign Corrupt Practices Act (FCPA), says Jan Fetter-Degges, Manager of RiskMetrics Group’s Global Sanctions Service. “Over the past year, the Justice Department has levied unprecedented fines on firms accused of foreign bribery and accounting fraud.”

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