Integrating ESG Into the Investment Process
The world of investment is changing: asset owners and managers are becoming increasingly aware of the potential risk and value impact of environmental, social, and governance (ESG) factors, and their potential effect on an investment profile.
Sustainable investing - understood as the incorporation of environmental, social, and governance (ESG) analysis into investment decision-making - is a growing discipline that offers opportunities for long-term value creation both for investors and society as a whole. The industry is a continually growing and changing field that encompasses institutional investors, asset managers and financial service providers.
In recent years, an increasing number of industry experts and academics across the globe have come to believe that key ESG developments - from climate change, to globalization, to the transforming societal expectations for corporations and finance - can have a significant role to play in long-term performance.
For asset owners, integration of ESG factors into the investment process helps to address the 'gap' between the long-term nature of their investments (30 years and longer for certain pension funds) and the short-term behavior of their managers. For asset managers, integration of ESG factors into the investment process aims to better assess long-term risks or risks that have high impact but low frequency of occurrence.
Sustainable investing has made progress on many fronts: tools for accessing information about ESG issues are increasingly available, and publicly available data around corporate social responsibility (CSR) and sustainability practices is continually expanding; institutional investment strategies focusing on ESG-themed investments or integrating ESG factors into the investment decision-making process are common across many traditional and alternative asset classes; and, finally, research into the relationship between financial performance and ESG factors, both academic and applied, continues to improve in quantity and quality. In addition, public communication standards with regards to sustainable investing-related activities and reporting have increased significantly.
The interest in ESG / sustainable investing has been driven by a variety of catalysts, including:
- The Role of the PRI
An increasing number of institutional investors are showing interest in ESG integration and are adopting sustainable investment strategies and policies. Since 2005, the number of signatories to the UN Principles for Responsible Investment (UN PRI) has grown steadily and reached 1,311 in November 2014, including 284 asset owners and 844 investment managers. Collectively they represent US$45 trillion of assets. According to the UN PRI, about 94 percent of signatories have adopted RI policies.
- The Role of Universal (Asset) Owners
Central to the philosophy of sustainable investing is a concept called 'Universal Ownership'. A Universal Owner is defined as a long-term owner of a diversified investment portfolio that is spread across the entire market or markets. As a result, Universal Owners collectively own a share of the economy and are effectively tied into this share in the longer term. Universal Owners subscribe to the hypothesis that the long-term financial interest of their investments depends on the ability of global markets to produce economic growth on a sustainable basis. As a result, they infer that their actions should involve managing their longer term risk through asset allocations and active ownership practices that are sensitive to longer term ESG factors.
- Availability of ESG Data and Information
ESG data and information has become more mainstream as well. Three main drivers have led to a greater availability of ESG information:
- Regulation: An increasing number of regulations that require companies to disclose their ESG performance have been adopted globally, including in emerging markets.
- ESG (research) networks: An increasing number of financial institutions are forming their own ESG and sustainability research departments supported by regional sustainable investment networks.
- Mainstream data providers: The market demand for ESG information has led to the entrance of well-funded financial information providers on the market and to the consolidation of smaller and more segregated data providers.
Today, MSCI ESG Research provides research, analysis and ratings for more than 5,500 global companies and MSCI ESG IVA Ratings are also mapped to over 260,000 fixed income securities.
To find out more about MSCI ESG Research's products and services, contact ESG Client Service.
 'Principles for Responsible Investment Signatories', principles for Responsible Investment: Official Home Report 2012, Link: www.unpri.org/signatories
 'PRI, 5 Years of PRI: Report on Progress,' PRI Report 2011, Link: http;//www.unpri.org/viewer/?file=wp-content/uploads/annual_report2011.pdf
 See 'Integrating ESG into the Investment Process' by Remy Briand, Roger Urwin, Chin-Ping Chia, MSCI ESG Research Whitepaper 2011, Link: http//www.msci.com/resources/research/articles/2011/Integrating_ESG_into_the_Investment_Process_Aug_2011.pdf